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PART I
WHERE I’M COMING FROM
1 My Call to Adventure: 1949–1967
2 Crossing the Threshold: 1967–1979
3 My Abyss: 1979–1982
4 My Road of Trials: 1983–1994
5 The Ultimate Boon: 1995–2010
6 Returning the Boon: 2011–2015
7 My Last Year and My Greatest Challenge: 2016–2017
8 Looking Back from a Higher Level
PART II
LIFE PRINCIPLES
1 Embrace Reality and Deal with It
2 Use the 5-Step Process to Get What You Want Out of Life
3 Be Radically Open-Minded
4 Understand That People Are Wired Very Differently
5 Learn How to Make Decisions Effectively
Life Principles: Putting It All Together
Summary and Table of Life Principles
PART III
WORK PRINCIPLES
Summary and Table of Work Principles
TO GET THE CULTURE RIGHT . . .
1 Trust in Radical Truth and Radical Transparency
2 Cultivate Meaningful Work and Meaningful Relationships
3 Create a Culture in Which It Is Okay to Make Mistakes and Unacceptable Not to
Learn from Them
4 Get and Stay in Sync

5 Believability Weight Your Decision Making
6 Recognize How to Get Beyond Disagreements
TO GET THE PEOPLE RIGHT . . .
7 Remember That the WHO Is More Important than the WHAT
8 Hire Right, Because the Penalties for Hiring Wrong Are Huge
9 Constantly Train, Test, Evaluate, and Sort People
TO BUILD AND EVOLVE YOUR MACHINE . . .
10 Manage as Someone Operating a Machine to Achieve a Goal
11 Perceive and Don’t Tolerate Problems
12 Diagnose Problems to Get at Their Root Causes
13 Design Improvements to Your Machine to Get Around Your Problems
14 Do What You Set Out to Do
15 Use Tools and Protocols to Shape How Work Is Done
16 And for Heaven’s Sake, Don’t Overlook Governance!
Work Principles: Putting It All Together
ACKNOWLEDGMENTS
ABOUT THE AUTHOR
CONCLUSION
APPENDIX: TOOLS AND PROTOCOLS FOR BRIDGEWATER’S IDEA
MERITOCRACY
BIBLIOGRAPHY
INDEX

To Barbara, the half of me who has made me whole for more than

forty years.

INTRODUCTION

Before I begin telling you what I think, I want to establish that I’m a “dumb

shit” who doesn’t know much relative to what I need to know. Whatever

success I’ve had in life has had more to do with my knowing how to deal

with my not knowing than anything I know. The most important thing I

learned is an approach to life based on principles that helps me find out

what’s true and what to do about it.

I’m passing along these principles because I am now at the stage in my life

in which I want to help others be successful rather than to be more successful

myself. Because these principles have helped me and others so much, I want

to share them with you. It’s up to you to decide how valuable they really are

and what, if anything, you want to do with them.

Principles are fundamental truths that serve as the foundations for

behavior that gets you what you want out of life. They can be applied again

and again in similar situations to help you achieve your goals.

Every day, each of us is faced with a blizzard of situations we must

respond to. Without principles we would be forced to react to all the things

life throws at us individually, as if we were experiencing each of them for the

first time. If instead we classify these situations into types and have good

principles for dealing with them, we will make better decisions more quickly

and have better lives as a result. Having a good set of principles is like having

a good collection of recipes for success. All successful people operate by

principles that help them be successful, though what they choose to be

successful at varies enormously, so their principles vary.

To be principled means to consistently operate with principles that can be

clearly explained. Unfortunately, most people can’t do that. And it’s very rare

for people to write their principles down and share them. That is a shame. I

would love to know what principles guided Albert Einstein, Steve Jobs,

Winston Churchill, Leonardo da Vinci, and others so I could clearly

understand what they were going after and how they achieved it and could

compare their different approaches. I’d like to know which principles are

most important to the politicians who want me to vote for them and to all the

other people whose decisions affect me. Do we have common principles that

bind us together—as a family, as a community, as a nation, as friends across

nations? Or do we have opposing principles that divide us? What are they?

Let’s be specific. This is a time when it is especially important for us to be

clear about our principles.

My hope is that reading this book will prompt you and others to discover

your own principles from wherever you think is best and ideally write them

down. Doing that will allow you and others to be clear about what your

principles are and understand each other better. It will allow you to refine

them as you encounter more experiences and to reflect on them, which will

help you make better decisions and be better understood.

HAVING YOUR OWN PRINCIPLES

We come by our principles in different ways. Sometimes we gain them

through our own experiences and reflections. Sometimes we accept them

from others, like our parents, or we adopt holistic packages of principles,

such as those of religions and legal frameworks.

Because we each have our own goals and our own natures, each of us

must choose our own principles to match them. While it isn’t necessarily a

bad thing to use others’ principles, adopting principles without giving them

much thought can expose you to the risk of acting in ways inconsistent with

your goals and your nature. At the same time, you, like me, probably don’t

know everything you need to know and would be wise to embrace that fact. If

you can think for yourself while being open-minded in a clearheaded way to

find out what is best for you to do, and if you can summon up the courage to

do it, you will make the most of your life. If you can’t do that, you should

reflect on why that is, because that’s most likely your greatest impediment to

getting more of what you want out of life.

That brings me to my first principle:

• Think for yourself to decide 1) what you want, 2)

what is true, and 3) what you should do to achieve

#1 in light of #2 . . .

. . . and do that with humility and open-mindedness so that you consider the best

thinking available to you. Being clear on your principles is important because

they will affect all aspects of your life, many times a day. For example, when

you enter into relationships with others, your principles and their principles

will determine how you interact. People who have shared values and

principles get along. People who don’t will suffer through constant

misunderstandings and conflicts. Think about the people you are closest to:

Are their values aligned with yours? Do you even know what their values or

principles are? Too often in relationships, people’s principles aren’t clear.

This is especially problematic in organizations where people need to have

shared principles to be successful. Being crystal clear about my principles is

why I labored so much over every sentence in this book.

The principles you choose can be anything you want them to be as long as

they are authentic—i.e., as long as they reflect your true character and values.

You will be faced with millions of choices in life, and the way you make

them will reflect the principles you have—so it won’t be long before the

people around you will be able to tell the principles you are really operating

by. The worst thing you can be is a phony, because if you’re a phony you will

lose people’s trust and your own self-respect. So you must be clear about

your principles and then you must “walk the talk.” If inconsistencies seem to

exist, you should explain them. It’s best to do that in writing because by

doing so, you will refine your written principles.

While I will be sharing my own principles, I want to make clear to you

that I don’t expect you to follow them blindly. On the contrary, I want you to

question every word and pick and choose among these principles so you

come away with a mix that suits you.

MY PRINCIPLES AND HOW I LEARNED THEM

I learned my principles over a lifetime of making a lot of mistakes and

spending a lot of time reflecting on them. Since I was a kid, I’ve been a

curious, independent thinker who ran after audacious goals. I got excited

about visualizing things to go after, had some painful failures going after

them, learned principles that would prevent me from making the same sort of

mistakes again, and changed and improved, which allowed me to imagine

and go after even more audacious goals and do that rapidly and repeatedly for

a long time. So to me life looks like the sequence you see on the opposite

page.

I believe that the key to success lies in knowing how to both strive for a lot

and fail well. By failing well, I mean being able to experience painful failures

that provide big learnings without failing badly enough to get knocked out of

the game.

This way of learning and improving has been best for me because of what

I’m like and because of what I do. I’ve always had a bad rote memory and

didn’t like following other people’s instructions, but I loved figuring out how

things work for myself. I hated school because of my bad memory but when I

was twelve I fell in love with trading the markets. To make money in the

markets, one needs to be an independent thinker who bets against the

consensus and is right. That’s because the consensus view is baked into the

price. One is inevitably going to be painfully wrong a lot, so knowing how to

do that well is critical to one’s success. To be a successful entrepreneur, the

same is true: One also has to be an independent thinker who correctly bets

against the consensus, which means being painfully wrong a fair amount.

Since I was both an investor and an entrepreneur, I developed a healthy fear

of being wrong and figured out an approach to decision making that would

maximize my odds of being right.

• Make believability-weighted decisions.

My painful mistakes shifted me from having a perspective of “I know I’m

right” to having one of “How do I know I’m right?” They gave me the

humility I needed to balance my audacity. Knowing that I could be painfully

wrong and curiosity about why other smart people saw things differently

prompted me to look at things through the eyes of others as well as my own.

That allowed me to see many more dimensions than if I saw things just

through my own eyes. Learning how to weigh people’s inputs so that I chose

the best ones—in other words, so that I believability weighted my decision

making—increased my chances of being right and was thrilling. At the same

time, I learned to:

• Operate by principles . . .

. . . that are so clearly laid out that their logic can easily be assessed and you and

others can see if you walk the talk. Experience taught me how invaluable it is to

reflect on and write down my decision-making criteria whenever I made a

decision, so I got in the habit of doing that. With time, my collection of

principles became like a collection of recipes for decision making. By sharing

them with the people at my company, Bridgewater Associates, and inviting

them to help me test my principles in action, I continually refined and

evolved them. In fact, I was able to refine them to the point that I could see

how important it is to:

• Systemize your decision making.

I discovered I could do that by expressing my decision-making criteria in the

form of algorithms that I could embed into our computers. By running both

decision-making systems—i.e., mine in my head and mine in the computer—

next to each other, I learned the computer could make better decisions than

me because it could process vastly more information than I could, and it

could do it faster and unemotionally. Doing that allowed me and the people I

worked with to compound our understanding over time and improve the

quality of our collective decision making. I discovered that such decision-

making systems—especially when believability weighted—are incredibly

powerful and will soon profoundly change how people around the world

make all kinds of decisions. Our principle-driven approach to decision

making has not only improved our economic, investment, and management

decisions, it has helped us make better decisions in every aspect of our lives.

Whether or not your own principles are systemized/computerized is of

secondary importance. The most important thing is that you develop your

own principles and ideally write them down, especially if you are working

with others.

It was that approach and the principles it yielded, and not me, that took me

from being an ordinary middle-class kid from Long Island to being successful

by a number of conventional measures—like starting a company out of my

two-bedroom apartment and building it into the fifth most important private

company in the U.S. (according to Fortune), becoming one of the one

hundred richest people in the world (according to Forbes), and being

considered one of the one hundred most influential (according to Time). They

led me to a perch from which I got to see success and life very differently

than I had imagined, and they gave me the meaningful work and meaningful

relationships I value even more than my conventional successes. They gave

me and Bridgewater far more than I ever dreamed of.

Until recently, I didn’t want to share these principles outside of

Bridgewater because I don’t like public attention and because I thought it

would be presumptuous to tell others what principles to have. But after

Bridgewater successfully anticipated the financial crisis of 2008–09, I got a

lot of media attention and so did my principles and Bridgewater’s unique way

of operating. Most of those stories were distorted and sensationalistic, so in

2010, I posted our principles on our website so people could judge them for

themselves. To my surprise, they were downloaded over three million times

and I was flooded with thank-you letters from all over the world.

I will give them to you in two books—Life and Work Principles in one

book, and Economic and Investment Principles in the other.

HOW THESE BOOKS ARE ORGANIZED

Since I have spent most of my adult life thinking about economies and

investing, I considered writing Economic and Investment Principles first. But

I decided to begin with my Life and Work Principles because they’re more

overarching and I’ve seen how well they work for people, independent of

their careers. Since they go so well together, they are combined here in one

book prefaced by a short autobiography, Where I’m Coming From.

Part I: Where I’m Coming From

In this part, I share some of the experiences—most importantly, my mistakes

—that led me to discover the principles that guide my decision making. To

tell you the truth, I still have mixed feelings about telling my personal story,

because I worry that it might distract you from the principles themselves and

from the timeless and universal cause-effect relationships that inform them.

For that reason, I wouldn’t mind if you decided to skip this part of the book.

If you do read it, try to look past me and my particular story to the logic and

merit of the principles I describe. Think about them, weigh them, and decide

how much, if at all, they apply to you and your own life circumstances—and

specifically, whether they can help you achieve your goals, whatever they

may be.

Part II: Life Principles

The overarching principles that drive my approach to everything are laid out

in Life Principles. In this section, I explain my principles in greater depth and

show how they apply in the natural world, in our private lives and

relationships, in business and policymaking, and of course at Bridgewater.

I’ll share the 5-Step Process I’ve developed for achieving one’s goals and

making effective choices; I’ll also share some of the insights I’ve gained into

psychology and neuroscience and explain how I’ve applied them in my

private life and in my business. This is the real heart of the book because it

shows how these principles can be applied to most anything by most anyone.

Part III: Work Principles

In Work Principles, you’ll get a close-up view of the unusual way we operate

at Bridgewater. I will explain how we’ve coalesced our principles into an

idea meritocracy that strives to deliver meaningful work and meaningful

relationships through radical truth and radical transparency. I’ll show you

how this works at a granular level and how it can be applied to nearly any

organization to make it more effective. As you will see, we are simply a

group of people who are striving to be excellent at what we do and who

recognize that we don’t know much relative to what we need to know. We

believe that thoughtful, unemotional disagreement by independent thinkers

can be converted into believability-weighted decision making that is smarter

and more effective than the sum of its parts. Because the power of a group is

so much greater than the power of an individual, I believe these work

principles are even more important than the life principles on which they’re

based.

What Will Follow This Book

This print book will be followed by an interactive book in the form of an app

that will take you into videos and immersive experiences so that your

learning is more experiential. The app will also get to know you through your

interactions with it in order to provide you with more personalized advice.

This book and the app will be followed by another volume containing two

other parts, Economic and Investment Principles, in which I will pass along

the principles that have worked for me and that I believe might help you in

these areas.

After that, there will be no advice I can give that will not be available in

these two books, and I will be done with this phase of my life.

Think for yourself!

1) What do you want?

2) What is true?

3) What are you going

to do about it?

PART I

WHERE I’M COMING

FROM

Time is like a river that carries us

forward into encounters with

reality that require us to make

decisions. We can’t stop our

movement down this river and we

can’t avoid those encounters. We

can only approach them in the best

possible way.

When we are children, other people, typically our parents, guide us through

our encounters with reality. As we get older, we begin to make our own

choices. We choose what we are going after (our goals), and that influences

our paths. If you want to be a doctor, you go to medical school; if you want to

have a family, you find a mate; and so on. As we move toward these goals,

we encounter problems, make mistakes, and run up against our own personal

weaknesses. We learn about ourselves and about reality and make new

decisions. Over the course of our lives, we make millions and millions of

decisions that are essentially bets, some large and some small. It pays to think

about how we make them because they are what ultimately determine the

quality of our lives.

We are all born with different thinking abilities but we aren’t born with

decision-making skills. We learn them from our encounters with reality.

While the path I went down is unique—being born to particular parents,

pursuing a particular career, having particular colleagues—I believe that the

principles I learned along the way will work equally well for most people on

most paths. As you read my story, try to look through it and me to the

underlying cause-and-effect relationships—at the choices I made and their

consequences, what I learned from them, and how I changed the ways I make

decisions as a result. Ask yourself what you want, seek out examples of other

people who got what they wanted, and try to discern the cause-and-effect

patterns behind their achievements so you can apply them to help you

achieve your own goals.

To help you understand where I’m coming from, I am giving you an

unvarnished account of my life and career, placing special emphasis on my

mistakes and weaknesses and the principles I learned from them.

CHAPTER 1

MY CALL TO ADVENTURE:

1949–1967

I was born in 1949 and grew up in a middle-class Long Island neighborhood,

the only son of a professional jazz musician and a stay-at-home mom. I was

an ordinary kid in an ordinary house and a worse-than-ordinary student. I

loved playing around with my pals—touch football in the streets and baseball

in a neighbor’s backyard when I was young, and chasing girls when I got

older.

Our DNA gives us our innate strengths and weaknesses. My most obvious

weakness was my bad rote memory. I couldn’t, and still can’t, remember

facts that don’t have reasons for being what they are (like phone numbers),

and I don’t like following instructions. At the same time, I was very curious

and loved to figure things out for myself, though that was less obvious at the

time.

I didn’t like school, not just because it required a lot of memorization, but

because I wasn’t interested in most of the things my teachers thought were

important. I never understood what doing well in school would get me other

than my mother’s approval.

My mother adored me and worried about my poor grades. Up until middle

school, she would make me go to my room and study for a couple of hours

before going out to play, but I couldn’t bring myself to do it. She was always

there for me. She folded and rubber-banded the newspapers I delivered and

baked cookies for the two of us to eat while we watched horror movies

together on Saturday nights. She died when I was nineteen. At the time, I

couldn’t imagine ever laughing again. Now when I think of her I smile.

My dad worked very late hours as a musician—until about three in the

morning—so he slept late on weekends. As a result, we didn’t have much of

a relationship when I was young other than him constantly nagging me to

take care of chores like mowing the lawn and cutting the hedges, which I

hated. He was a responsible man dealing with an irresponsible kid. Memories

of how we interacted seem funny to me today. For example, one time he told

me to cut the grass and I decided to do just the front yard and postpone doing

the back, but then it rained for a couple of days and the backyard grass

became so high I had to cut it with a sickle. That took so long that by the time

I was finished, the front yard was too high to mow, and so on.

After my mother died, my dad and I became very close, especially when I

started my own family. I both liked and loved him. He had a casual, fun way

about him the way musicians tend to, and I admired his strong character,

which I assume came from living through the Great Depression and fighting

in both World War II and the Korean War. I have memories of him from

when he was in his seventies, not hesitating to drive through big snowstorms,

shoveling himself out whenever he got stuck like it was no big deal. After

playing in clubs and cutting records for most of his life, he began a second

career in his midsixties, teaching music in high school and at a local

community college, which he continued until he had a heart attack at eighty-

one. He lived another decade after that, as sharp as ever mentally.

When I didn’t want to do something, I would fight it, but when I was

excited about something, nothing could hold me back. For example, while I

resisted doing chores at home, I eagerly did them outside the house to earn

money. Starting at age eight, I had a newspaper route, shoveled snow off

people’s driveways, caddied, bussed tables and washed dishes at a local

restaurant, and stocked shelves at a nearby department store. I don’t

remember my parents encouraging me to do these jobs so I can’t say how I

came by them. But I do know that having those jobs and having some money

to handle independently in those early years taught me many valuable lessons

I wouldn’t have learned in school or at play.

In my early years the psychology of the 1960s U.S. was aspirational and

inspirational—to achieve great and noble goals. It was like nothing I have

seen since. One of my earliest memories was of John F. Kennedy, an

intelligent, charismatic man who painted vivid pictures of changing the world

for the better—exploring outer space, achieving equal rights, and eliminating

poverty. He and his ideas had a major effect on my thinking.

The United States was then at its peak relative to the rest of the world,

accounting for 40 percent of its economy compared to about 20 percent

today; the dollar was the world’s currency; and the U.S. was the dominant

military power. Being “liberal” meant being committed to moving forward in

a fast and fair way, while being “conservative” meant being stuck in old and

unfair ways—at least that’s how it seemed to me and to most of the people

around me. As we saw it, the U.S. was rich, progressive, well managed, and

on a mission to improve quickly at everything. I might have been naive but I

wasn’t alone.

In those years, everyone was talking about the stock market, because it

was doing great and people were making money. This included the people

playing at a local golf course called Links where I started caddying when I

was twelve. So I took my caddying money and started playing the stock

market. My first investment was in Northeast Airlines. I bought it because it

was the only company I’d heard of that was selling for less than $5 a share. I

figured the more shares I bought, the more money I would make. That was a

dumb strategy, but I tripled my money. Northeast Airlines was actually about

to go broke and another company acquired it. I got lucky, but I didn’t know it

at the time. I just thought making money in the markets was easy, so I was

hooked.

In those days, Fortune magazine had a little tear-out coupon you could

mail in to get free annual reports from Fortune 500 companies. I ordered

them all. I can still remember watching the mailman unhappily lugging all

those reports to our door, and I dug into every one of them. That was how I

began building an investment library. As the stock market continued to climb,

World War II and the Depression seemed like distant memories and investing

seemed like simply a matter of buying anything and watching it go up. It

would certainly go up, the common knowledge held, because managing the

economy had developed into a science. After all, stocks had nearly

quadrupled over the previous ten years, and some had done much better than

that.

As a result, “dollar-cost averaging”—investing essentially the same dollar

amount in the market every month, no matter how few or many shares it

could buy—was the strategy most people followed. Of course, picking the

best stocks was even better, so that’s what I and everyone else tried to do.

There were thousands to choose from, all neatly listed on the last few pages

of the newspaper.

While I liked playing the markets, I also loved playing around with my

friends, whether in the neighborhood when I was a kid, using fake IDs to get

into bars when we were teens, or, nowadays, going to music festivals and on

scuba-diving trips together. I’ve always been an independent thinker inclined

to take risks in search of rewards—not just in the markets, but in most

everything. I also feared boredom and mediocrity much more than I feared

failure. For me, great is better than terrible, and terrible is better than

mediocre, because terrible at least gives life flavor. The high school yearbook

quote my friends chose for me was from Thoreau: “If a man does not keep

pace with his companions, perhaps it is because he hears a different

drummer. Let him step to the music which he hears, however measured or far

away.”

In 1966, my senior year of high school, the stock market was still booming

and I was making money and having a blast, cutting school with my best

friend Phil to go surfing, and doing what fun-loving high school boys usually

do. Of course I didn’t know it then, but that year was to be the stock market’s

top. After that, almost everything I thought I knew about the markets was

proven wrong.

1 A surprise simultaneous attack by the North Vietnamese on more than one hundred cities

and towns in South Vietnam.

CHAPTER 2

CROSSING THE THRESHOLD:

1967–1979

I came into this period with the biases I had picked up from my experiences

and the people around me. In 1966, asset prices reflected investors’ optimism

about the future. But between 1967 and 1979, bad economic surprises led to

big and unexpected price declines. Not just the economy and the markets but

social sentiment deteriorated as well. Living through that taught me that

while almost everyone expects the future to be a slightly modified version of

the present, it is usually very different. But I didn’t know that in 1967.

Certain that stocks would eventually rebound, I kept buying them, even as the

market fell and I lost money until I figured out what was going wrong and

how to deal with it. I gradually learned that prices reflect people’s

expectations, so they go up when actual results are better than expected and

they go down when they are worse than expected. And most people tend to

be biased by their recent experiences.

That fall, I started at a local college, C. W. Post. I got in on probation

because of my C average in high school. But unlike high school, I loved

college because I could learn about things that interested me, not because I

had to, so I got great grades. I also loved living away from home and having

independence.

Learning to meditate helped too. When the Beatles visited India in 1968 to

study Transcendental Meditation at the ashram of Maharishi Mahesh Yogi, I

was curious to learn it, so I did. I loved it. Meditation has benefited me

hugely throughout my life because it produces a calm open-mindedness that

allows me to think more clearly and creatively.

I majored in finance in college because of my love for the markets and

because that major had no foreign language requirement—so it allowed me to

learn what I was interested in, both inside and outside class. I learned a lot

about commodity futures from a very interesting classmate, a Vietnam

veteran quite a bit older than me. Commodities were attractive because they

could be traded with very low margin requirements, meaning I could leverage

the limited amount of money I had to invest. If I could make winning

decisions, which I planned to do, I could borrow more to make more. Stock,

bond, and currency futures didn’t exist back then. Commodity futures were

strictly real commodities like corn, soybeans, cattle, and hogs. So those were

the markets I started to trade and learn about.

My college years coincided with the era of free love, mind-expanding drug

experimentation, and rejection of traditional authority. Living through it had a

lasting effect on me and many other members of my generation. For example,

it deeply impacted Steve Jobs, whom I came to empathize with and admire.

Like me, he took up meditation and wasn’t interested in being taught as much

as he loved visualizing and building out amazing new things. The times we

lived in taught us both to question established ways of doing things—an

attitude he demonstrated superbly in Apple’s iconic “1984” and “Here’s to

the Crazy Ones,” which were ad campaigns that spoke to me.

For the country as a whole, those were difficult years. As the draft

expanded and the numbers of young men coming home in body bags soared,

the Vietnam War split the country. There was a lottery based on birthdates to

determine the order of those who would be drafted. I remember listening to

the lottery on the radio while playing pool with my friends. It was estimated

that the first 160 or so birthdays called would be drafted, though they read off

all 366 dates. My birthday was forty-eighth.

I wasn’t smart enough to be afraid of going to war because I naively

thought nothing bad could happen to me, but I didn’t want to go because I

was charging forward with my life and to put it on hold for two years seemed

like an eternity. My dad, though, was adamantly against the war and hell-bent

against me going, even though he had believed in and fought in the prior two

wars. He had me examined by a doctor who discovered I had hypoglycemia,

which gave me an exemption. When I look back on that, I see that I got out of

serving on a technicality—that my dad was essentially helping me dodge the

draft—which now gives me mixed feelings. I feel guilty I didn’t do my part,

relieved I didn’t experience the harmful consequences so many others

suffered from the war, and appreciative of my dad for the love behind his

effort to protect me. I have no idea what I’d do if I were faced with the same

situation today.

As America’s politics and economy deteriorated, the country’s mood

became depressed. The Tet Offensive in January 1968

seemed to convey the

U.S. was losing the war; that same year Lyndon Johnson decided not to run

for a second term and Richard Nixon was elected, beginning an even more

difficult era. At the same time, France’s president Charles de Gaulle was

turning in his country’s dollars for gold because he was concerned the U.S.

was printing money to finance its spending. Watching the news and the

market move together, I began to see the whole picture and understand the

cause-effect relationship between the two.

Around 1970 or 1971, I noticed gold was starting to tick up in world

markets. Until then, like most people, I hadn’t paid much attention to

currency rates because the currency system had been stable throughout my

lifetime. But as currency events increasingly appeared in the news, they

caught my attention. I learned that other currencies were fixed against the

dollar, that the dollar was fixed against gold, that Americans weren’t allowed

to own gold (though I wasn’t sure why), and that other central banks could

convert their paper dollars into gold, which was how they were assured that

they wouldn’t be hurt if the U.S. printed too many dollars. I heard our

government officials pooh-pooh the worries about the dollar and the

excitement about gold, assuring us that the dollar was sound and that gold

was just an archaic metal. Speculators were behind the rising gold prices,

they said, and they would get burned once things settled down. Back then, I

still assumed that government officials were honest.

In the spring of 1971, I graduated college with a nearly perfect grade point

average, which got me into Harvard Business School. The summer before I

started at HBS, I got a job as a clerk on the floor of the New York Stock

Exchange. By midsummer, the dollar problem began to reach a breaking

point. There were reports that Europeans wouldn’t accept dollars from

American tourists. The global monetary system was in the process of

breaking down, but that wasn’t clear to me quite yet.

Then, on Sunday, August 15, 1971, President Nixon went on television to

announce that the U.S. would renege on its promise to allow dollars to be

turned in for gold, which led the dollar to plummet. Since government

officials had promised not to devalue the dollar, I listened with amazement as

he spoke. Instead of addressing the fundamental problems behind the

pressure on the dollar, he continued to blame speculators, crafting his words

to make it sound like he was moving to support the dollar while his actions

were doing just the opposite. “Floating it,” as Nixon was doing, and then

letting it sink like a stone, looked a lot like a lie to me. Over the decades

since, I’ve repeatedly seen policymakers deliver such assurances immediately

before currency devaluations, so I learned not to believe government

policymakers when they assure you that they won’t let a currency devaluation

happen. The more strongly they make those assurances, the more desperate

the situation probably is, so the more likely it is that a devaluation will take

place.

As I listened to Nixon speak, I wondered what those developments meant.

Money as we’d known it—a claim check to get gold—no longer existed. That

couldn’t be good. It seemed clear to me that the era of promise that Kennedy

had personified was unraveling.

Monday morning I walked onto the floor of the exchange expecting

pandemonium. There was pandemonium all right, but not the sort I expected:

Instead of falling, the stock market jumped about 4 percent, a significant

daily gain.

To try to understand what was happening, I spent the rest of that summer

studying past currency devaluations. I learned that everything that was going

on—the currency breaking its link to gold and devaluing, the stock market

soaring in response—had happened before, and that logical cause-effect

relationships made those developments inevitable. My failure to anticipate

this, I realized, was due to my being surprised by something that hadn’t

happened in my lifetime, though it had happened many times before. The

message that reality was conveying to me was “You better make sense of

what happened to other people in other times and other places because if you

don’t you won’t know if these things can happen to you and, if they do, you

won’t know how to deal with them.”

Enrolling at Harvard Business School that fall, I was excited about

meeting the extraordinarily intelligent people from all over the planet who

would be my classmates. And high as my expectations were, the experience

was even better. I lived with people from all over the world and we partied

together in an exciting, eclectic environment. There was no teacher in front of

a blackboard telling us what to remember and no tests to see whether we

remembered it. Instead we were given actual case studies to read and analyze.

Then we gathered in groups to thrash out what we would do if we were in the

shoes of the people in those situations. This was my kind of school!

Meanwhile, thanks to the wave of money printing that had followed the

demise of the gold standard, the economy and the stock market were soaring.

Stocks were in again in 1972, and the fashion at the time was the Nifty 50.

This group of fifty stocks had fast and steady earnings growth and were

widely believed to be a sure thing.

As hot as the stock market was, I was more interested in trading

commodities, so that spring I begged the director of commodities at Merrill

Lynch to give me a summer job. He was surprised because people from

places like Harvard Business School weren’t typically interested in

commodities, which were considered an obscure stepchild of the Wall Street

brokerage industry. Up until then, as far as I know, no Harvard Business

School student had ever worked in commodity futures anywhere. Most Wall

Street firms didn’t even have commodity futures divisions, and Merrill

Lynch’s was small, tucked away on a side street, and furnished with basic

metal desks.

A few months later, when I was back for my second year at HBS, the first

oil shock began, with prices quadrupling in a matter of months. The U.S.

economy slowed, commodity prices soared, and in 1973 the stock market

took a dive. Once again, I was blindsided—but in retrospect I could see that

the dominoes had fallen in a logical sequence.

In this case, the debt-financed overspending of the 1960s had continued

into the early 1970s. The Fed had funded this spending with easy-credit

policies, but by paying back its debts with depreciated paper money instead

of gold-backed dollars, the U.S. effectively defaulted. Naturally, with all this

money printing the dollar plunged in value. That allowed for more easy

credit, which led to even more spending. The inflationary surge that followed

the breakdown of the currency system sent commodity prices even higher. In

response, in 1973, the Fed tightened monetary policy, which is what central

banks do when inflation and growth are too strong. This in turn caused the

worst decline in stocks and the worst weakening of the economy since the

Great Depression. The Nifty 50 were particularly affected, plunging severely.

The lesson? When everybody thinks the same thing—such as what a sure

bet the Nifty 50 is—it is almost certainly reflected in the price, and betting on

it is probably going to be a mistake. I also learned that for every action (such

as easy money and credit) there is a consequence (in this case, higher

inflation) roughly proportionate to that action, which causes an

approximately equal and opposite reaction (tightening of money and credit)

and market reversals.

I was beginning to see things happening over and over again, which led

me to see that most everything is “another one of those”: Most everything has

happened repeatedly before for logical cause-effect reasons. Of course, being

able to both properly identify which ones of those are happening and to

understand the cause-effect relationships behind them remained difficult.

Though most everything seemed inevitable and logical in retrospect, nothing

was nearly as clear in real time.

Because people chase what’s hot and avoid what’s not, stock investing fell

out of favor after 1973 and commodity trading became the thing to do. With

my background in commodities and my Harvard MBA, I became a sought-

after property. Dominick & Dominick, a middle-sized, hundred-year-old

brokerage firm, hired me as director of commodities for $25,000 a year,

which was near the top of what HBS graduate starting salaries were that year.

My new boss paired me with an older, experienced guy who had lots of

commodities brokerage experience, and we were assigned the task of setting

up a commodities division. I was in way over my head, though I was too

arrogant to realize it at the time. I probably would have learned a lot of

painful lessons had the job continued, but the bad stock market took

Dominick & Dominick under before we’d made much progress.

As the economy unraveled, the Watergate scandal dominated the headlines

and I saw again how politics and economics intertwine, usually with

economics leading. This downward spiral led people to become pessimistic,

so they sold their stocks and the market continued to fall. Things couldn’t

have gotten much worse but everyone was afraid they would. It was the

mirror image of what I’d witnessed in 1966 when the market hit its top, and

just as it was then, the consensus was wrong. When people are very

pessimistic, they sell out, prices typically get very cheap, and action to

improve conditions has to be taken. Sure enough, the Fed eased its monetary

policy and stocks hit bottom in December 1974.

At the time, I was single and living in New York; I was having a great

time partying with friends from HBS and dating a lot. My roommate was

dating a Cuban woman and he set me up on a blind date with one of her

friends, an exotic woman from Spain named Barbara who could barely speak

English. This wasn’t a problem, because we communicated in different ways.

She thrilled me for nearly two years before we moved in together, got

married, had four sons, and shared an amazing life together. She still thrills

me but is too private a person for me to say more about her.

While I worked in the brokerage business, I also traded my own account.

Though I had many more winning positions than losing ones, I can only

recall the losing ones now. I remember one big one when I owned pork

bellies. For several days the market for them was limit down—meaning that

the price had fallen so low that trading had to be stopped. I later described the

impact of this experience to Jack Schwager, the author of Hedge Fund

Market Wizards:

In those days, we had the big commodity boards, which clicked whenever

prices changed. So each morning, on the opening, I would see and hear

the market click down 200 points, the daily limit, stay unchanged at that

price, and know that I had lost that much more, with the amount of

potential additional losses still undefined. It was a very tactile

experience . . . [and] it taught me the importance of risk controls, because

I never wanted to experience that pain again. It enhanced my fear of

being wrong and taught me to make sure that no single bet, or even

multiple bets, could cause me to lose more than an acceptable amount. In

trading you have to be defensive and aggressive at the same time. If you

are not aggressive, you are not going to make money, and if you are not

defensive, you are not going to keep money. I believe that anyone who has

made money in trading has had to experience horrendous pain at some

point. Trading is like working with electricity; you can get an electric

shock. With that pork belly trade and other trades, I felt the electric shock

and the fear that comes with it.

After Dominick & Dominick closed its retail business, I moved on to a

bigger, more successful brokerage firm. During my short stay there, it took

over numerous other firms and changed its name several times, eventually

becoming Shearson, though Sandy Weill stayed in charge through it all.

Shearson put me in charge of its futures hedging business, which included

both commodity futures and financial futures. I was the person helping

clients who had price risks in their businesses manage them by using futures.

I developed quite an expertise in the grain and livestock markets, which often

led me down to West Texas and the agricultural areas of California. The

Shearson brokers, cattle producers, and grain dealers I dealt with were great

folks who brought me into their worlds, taking me to honky-tonks, dove

hunts, and barbecues. We worked and had a blast together, and I built a

second life with them that lasted several years—though my job at Shearson

lasted only a bit more than a year.

Much as I loved the job and the people I worked with, I didn’t fit into the

Shearson organization. I was too wild. For example, as a joke that now seems

pretty stupid, I hired a stripper to drop her cloak while I was lecturing at a

whiteboard at the California Grain & Feed Association’s annual convention. I

also punched my boss in the face. Not surprisingly, I was fired.

But the brokers, their clients, and even the ones who fired me liked me and

wanted to keep getting my advice. Even better, they were willing to pay me

for it, so in 1975 I started Bridgewater Associates.

STARTING BRIDGEWATER

Actually, I restarted it. Just after I graduated from HBS and went to work in

commodities at Dominick & Dominick, I’d set up a little business with Bob

Scott, a friend from HBS. Along with a few pals in other countries, we made

halfhearted attempts to sell commodities from the U.S. to other countries. We

called it Bridgewater because we were “bridging the waters” and it had a

good ring to it. By 1975 there wasn’t much left of this commodities company,

but as it did already exist on paper, I used it.

I worked out of my two-bedroom apartment. When a pal from HBS who I

shared the apartment with moved out, I made his bedroom an office. I worked

with another friend I played rugby with, and we hired a great young woman

who worked as our assistant. That was Bridgewater.

I spent most of my time following the markets and putting myself in the

shoes of my corporate clients to show them how I would handle market risks

if I were them. And of course I continued to trade my own account. Pursuing

a mission with friends to help clients beat the markets was much more fun

than having a real job. As long as my basic living expenses were covered, I

knew I’d be happy.

In 1977, Barbara and I decided to have a child, so we got married. We

moved into a rented brownstone in Manhattan and I moved the company

there too. The Russians were buying lots of grain at the time and wanted my

advice, so I took Barbara on a combined honeymoon–business trip to the

USSR. We arrived in Moscow on New Year’s Eve and rode by bus from the

drab airport through a dusting of snow, past St. Basil’s Cathedral to a big

party with a lot of incredibly friendly, fun-loving Russians.

My business has always been a way to get me into exotic places and allow

me to meet interesting people. If I make any money from those trips, that’s

just icing on the cake.

MODELING MARKETS AS MACHINES

I was really getting my head into the livestock, meat, grain, and oilseed

markets. I loved them because they were concrete and less subject than stocks

to distorted perceptions of value. While stocks could stay too high or too low

because “greater fools” kept buying or selling them, livestock ended up on

the meat counter where it would be priced based on what consumers were

willing to pay. I could visualize the processes that led to those sales and see

the relationships underlying them. Since livestock eat grain (mostly corn) and

soymeal, and since corn and soybeans compete for acreage, those markets are

closely related. I learned just about everything imaginable about them—what

the planted acreage and typical yields were in each of the major growing

areas; how to convert rainfall levels in different weeks of the growing season

into yield estimates; how to project harvest sizes, carrying costs, and

livestock inventories by weight group, location, and rates of weight gain; and

how to project dressing yields, retailer margins, consumer preferences by cut

of meat, and the amounts to be slaughtered in each season.

This wasn’t academic learning: People with practice in the business

showed me how the agricultural processes worked, and I organized what they

told me into models I used to map the interactions of those parts through

time.

For example, by knowing how many cattle, chickens, and hogs were being

fed, how much grain they ate, and how fast they gained weight, I could

project both when and how much meat would come to market and when and

how much corn and soymeal would be consumed. Likewise, by seeing how

much acreage was planted with corn and soybeans in all the growing areas,

doing regressions that showed how rainfall affected the yields in each of

these areas, and applying weather forecasts and rainfall data, I could project

the timing and quantity of corn and soybean production. To me it all looked

like a beautiful machine with logical cause-effect relationships. By

understanding these relationships, I could come up with decision rules (or

principles) I could model.

These early models were a far cry from the ones we use now; they were

back-of-the-envelope sketches, analyzed and converted into computer

programs with the technology I could afford at the time. At the very

beginning, I did regressions on my handheld Hewlett-Packard HP-67

calculator, plotted charts by hand with colored pencils, and recorded every

trade in composition notebooks. When the personal computer came along, I

could input the numbers and watch them be converted into pictures of what

would happen on spreadsheets. Knowing how cattle, hogs, and chickens

progressed through their stages of production, how they competed for meat-

eater dollars, what meat-eaters would spend and why, and how the profit

margins of meatpackers and retailers would influence their behaviors (for

example, which cuts of meat they would push in advertisements), I could see

how the machine produced cattle, hog, and chicken prices that I could bet on.

As basic as those early models were, I loved building and refining them—

and they were good enough to make me money. The approach to price

determination I was using was different from the one I had learned in my

economics classes where supply and demand were both measured in terms of

quantities sold. I found it much more practical to measure demand as the

amount spent (instead of as the quantity bought) and to look at who the

buyers and sellers were and why they bought and sold. I will explain this

approach in Economic and Investment Principles.

This different approach was one of the key reasons I caught economic and

market moves others missed. From that point on, whenever I looked at any

market—commodities, stocks, bonds, currencies, whatever—I could see and

understand imbalances that others who defined supply and demand in the

traditional way (as units that equaled each other) missed.

Visualizing complex systems as machines, figuring out the cause-effect

relationships within them, writing down the principles for dealing with them,

and feeding them into a computer so the computer could “make decisions”

for me all became standard practices.

Don’t get me wrong. My approach was far from perfect. I vividly

remember one “can’t lose” bet that personally cost me about $100,000. That

was most of my net worth at the time. More painful still, it hurt my clients

too. The most painful lesson that was repeatedly hammered home is that you

can never be sure of anything: There are always risks out there that can hurt

you badly, even in the seemingly safest bets, so it’s always best to assume

you’re missing something. This lesson changed my approach to decision

making in ways that will reverberate throughout this book—and to which I

attribute much of my success. But I would make many other mistakes before

I fully changed my behavior.

BUILDING THE BUSINESS

While making money was good, having meaningful work and meaningful

relationships was far better. To me, meaningful work is being on a mission I

become engrossed in, and meaningful relationships are those I have with

people I care deeply about and who care deeply about me.

Think about it: It’s senseless to have making money as your goal as

money has no intrinsic value—its value comes from what it can buy, and it

can’t buy everything. It’s smarter to start with what you really want, which

are your real goals, and then work back to what you need to attain them.

Money will be one of the things you need, but it’s not the only one and

certainly not the most important one once you get past having the amount you

need to get what you really want.

When thinking about the things you really want, it pays to think of their

relative values so you weigh them properly. In my case, I wanted meaningful

work and meaningful relationships equally, and I valued money less—as long

as I had enough to take care of my basic needs. In thinking about the relative

importance of great relationships and money, it was clear that relationships

were more important because there is no amount of money I would take in

exchange for a meaningful relationship, because there is nothing I could buy

with that money that would be more valuable. So, for me, meaningful work

and meaningful relationships were and still are my primary goals and

everything I did was for them. Making money was an incidental consequence

of that.

In the late 1970s, I began sending my observations about the markets to

clients via telex. The genesis of these Daily Observations (“Grains and

Oilseeds,” “Livestock and Meats,” “Economy and Financial Markets”) was

pretty simple: While our primary business was in managing risk exposures,

our clients also called to pick my brain about the markets. Taking those calls

became time-consuming, so I decided it would be more efficient to write

down my thoughts every day so others could understand my logic and help

improve it. It was a good discipline since it forced me to research and reflect

every day. It also became a key channel of communication for our business.

Today, almost forty years and ten thousand publications later, our Daily

Observations are read, reflected on, and argued about by clients and

policymakers around the world. I’m still writing them, along with others at

Bridgewater, and expect to continue to write them until people don’t care to

read them or I die.

In addition to providing clients with these observations and advice, I

began to manage their exposures by buying and selling on their behalf.

Sometimes I was paid a fixed fee each month and sometimes I received a

percentage of the profits. Among my consulting clients during this period

was McDonald’s, which was a huge beef buyer, and Lane Processing, then

the largest chicken producer in the country. I made them both a lot of money

—especially Lane Processing, which did even better from its speculations in

the grain and soy markets than it did from raising and selling chickens.

Around this time, McDonald’s had conceived of a new product, the

Chicken McNugget, but they were reluctant to bring it to market because of

their concern that chicken prices might rise and squeeze their profit margins.

Chicken producers like Lane wouldn’t agree to sell to them at a fixed price

because they were worried that their costs would go up and they would be

squeezed.

As I thought about the problem, it occurred to me that in economic terms a

chicken can be seen as a simple machine consisting of a chick plus its feed.

The most volatile cost that the chicken producer needed to worry about was

feed prices. I showed Lane how to use a mix of corn and soymeal futures to

lock in costs so they could quote a fixed price to McDonald’s. Having greatly

reduced its price risk, McDonald’s introduced the McNugget in 1983. I felt

great about helping make that happen.

I identified similar types of price relationships in the cattle and meat

markets. For example, I showed cattle feeders how they could lock in strong

profit margins by hedging good price relationships between their cost items

(feeder cattle, corn, and soymeal) and what they were going to sell (fed

cattle) six months later. I developed a way of selling different cuts of fresh

meat for future delivery at fixed prices far below frozen meat prices but that

still produced big profit margins. Combining my clients’ deep understanding

of the way the “machines” of their own businesses operated with my

knowledge of the way markets functioned worked to our mutual advantage,

while making the markets more efficient overall. My ability to visualize these

complex machines gave us a competitive edge against those who were

shooting from the hip, and eventually changed the way these industries

operated. And, as always, it was a kick to be working with people I liked.

On March 26, 1978, my wife gave birth to our first son, Devon. To have a

child was the most difficult decision I ever made, because I couldn’t know

what the experience would be like and it would be irrevocable. It turned out

to be my best decision. While I won’t delve too much into my family life in

this book, I pursued it with the same sort of intensity with which I pursued

my career, and I linked them. To give you an idea about how interwoven they

were in my mind, Devon was named after one of the oldest breeds of cattle

known to man, among the first breeds imported into the U.S. and renowned

for its high fertility.

2 His inability to meet his obligations, especially his margin calls at brokerage houses,

could have led to cascading defaults.

CHAPTER 3

MY ABYSS:

1979–1982

From 1950 until 1980, debt, inflation, and growth moved up and down

together in steadily larger waves, with each bigger than the one before,

especially after the dollar’s link to gold was broken in 1971. In the 1970s,

there were three such waves. The first came in 1971, as a result of the dollar’s

devaluation. The second, which came between 1974 and 1975, took inflation

to its highest level since World War II. The Fed tightened the money supply,

driving interest rates to record highs, which caused the worst stock market

and economic downturn since the 1930s. The third and largest wave came in

1979–82 and was one of the greatest economic/market crescendos and

reversals since 1929–32. Interest rates and inflation soared and crashed;

stocks, bonds, commodities, and currencies went through one of their most

volatile periods ever; and unemployment hit its highest level since the Great

Depression. It was a time of extreme turbulence for the global economy, for

the markets, and for me personally.

In 1978–80 (as in 1970–71 and in 1974–75) different markets began to

move in unison because they were more influenced by swings in money and

credit growth than by changes in their individual supply-demand balances.

These big moves were exacerbated by the oil shock that followed the fall of

the Shah of Iran. That oil market volatility led to the creation of the first oil

futures contract, which gave me trading opportunities (by then, there were

futures markets in interest rates and currencies as well, and I was making bets

in all of them).

Because all markets were being driven by these factors, I immersed myself

in macroeconomics and historical data (especially interest rates and currency

data) to improve my understanding of the machine at play. As inflation began

to rise in 1978, I realized the Fed would likely act to tighten the monetary

supply. By July 1979, inflation was clearly out of control, and President

Jimmy Carter appointed Paul Volcker chairman of the Federal Reserve. A

few months later, Volcker announced that the Fed would limit the growth of

the money supply to 5.5 percent. According to my calculations at the time,

5.5 percent money growth would break the inflation spiral—but it would also

strangle the economy and markets and likely cause a catastrophic debt crisis.

A SILVER ROLLER COASTER

Just before Thanksgiving, I met with Bunker Hunt, then the richest man in

the world, at the Petroleum Club in Dallas. Bud Dillard, a Texan friend and

client of mine who was big in the oil and cattle businesses, had introduced us

a couple of years before, and we regularly talked about the economy and

markets, especially inflation. Just a few weeks before our meeting, Iranian

militants had stormed the U.S. embassy in Tehran, taking fifty-two

Americans hostage. There were long lines to buy gas and extreme market

volatility. There was clearly a sense of crisis: The nation was confused,

frustrated, and angry.

Bunker saw the debt crisis and inflation risks pretty much as I saw them.

He’d been wanting to get his wealth out of paper money for the past few

years, so he’d been buying commodities, especially silver, which he had

started purchasing for about $1.29 per ounce, as a hedge against inflation. He

kept buying and buying as inflation and the price of silver went up, until he

had essentially cornered the silver market. At that point, silver was trading at

around $10. I told him I thought it might be a good time to get out because

the Fed was becoming tight enough to raise short-term interest rates above

long-term rates (which was called “inverting the yield curve”). Every time

that happened, inflation-hedged assets and the economy went down. But

Bunker was in the oil business, and the Middle East oil producers he talked to

were still worried about the depreciation of the dollar. They had told him they

were also going to buy silver as a hedge against inflation so he held on to it in

the expectation that its price would continue to rise. I got out.

On December 8, 1979, Barbara and I had our second son, Paul. Everything

was changing very fast, but I loved the intensity of it all.

By early 1980, silver had gone to nearly $50, and as rich as he was,

Bunker became a lot richer. While I had made a lot of money on silver’s rise

to $10, I was kicking myself for missing the ride to $50. But at least, by being

out, I didn’t lose money. There are anxious times in every investor’s career

when your expectations of what should be happening aren’t aligned with

what is happening and you don’t know if you’re looking at great

opportunities or catastrophic mistakes. Because I had a strong tendency to be

right but early, I was inclined to think that was the case. It was, but to have

missed the $40 move up was inexcusable to me.

When the plunge finally did happen, in March 1980, silver crashed back

down below $11. It ruined Hunt, and he nearly brought down the whole U.S.

economy as he fell.

The Fed had to intervene to control the ripple effects. All

of this pounded an indelible lesson into my head: Timing is everything. I was

relieved that I was out of that market, but watching the richest man in the

world—who was also someone I empathized with—go broke was jarring. Yet

it was nothing compared to what was to come.

EXPANDING THE TEAM

Later that same year, a great guy named Paul Colman joined Bridgewater.

We had become good friends from our dealings in the cattle and beef

industry, and I respected his intellect and values, so I convinced him we

should conquer that world together. He brought his wonderful wife and kids

up from Guymon, Oklahoma, and our families became inseparable. We ran

the business in a scrappy, seat-of-the-pants way. Because the office part of

the brownstone where I lived and worked was generally such a mess—with

chicken bones or other scraps from working through the previous night’s

dinner littering my desk—we held all our client meetings at the Harvard

Club. Paul would hide a clean blue oxford shirt and tie amid the mess so I’d

have something to wear. In 1981, we decided we wanted to raise our families

in more of a country setting, so we all moved up to Wilton, Connecticut, to

run Bridgewater from there.

Colman and I worked by challenging each other’s ideas and trying to find

the best answers; it was a constant back-and-forth, which we both enjoyed,

especially at a time when there was so much to figure out. We would debate

about the markets and the forces behind them late into the night, plug data

into the computer before we went to bed, and see what it spit out in the

morning.

MY BIG DEPRESSION CALL

The economy was in even worse shape in 1979–81 than it was during the

financial crisis of 2007–08 and the markets were more volatile. In fact, some

would say this was the most volatile period ever. The charts opposite going

back to 1940 show the volatility of interest rates and gold.

As you can see, there had been nothing like it prior to 1979–82. It was one

of the most pivotal times in the last hundred years. The political pendulum

throughout the world swung to the right, bringing Margaret Thatcher, Ronald

Reagan, and Helmut Kohl to power. “Liberal” had ceased to mean being in

favor of progress and had come to mean “paying people not to work.”

As I saw it, the Fed was stuck between a rock and a hard place. They

either had to a) print money to relieve debt problems and keep the economy

going (which had already pushed inflation to 10 percent in 1981 and was

causing people to dump bonds and buy inflation-hedged assets), or b) break

the back of inflation by becoming bone-crushingly tight (which would break

the back of debtors because debt was at the highest levels since the Great

Depression). The worsening problem showed up in both progressively higher

levels of inflation and progressively worse levels of economic activity. Both

appeared to be coming to a head. Debts continued to rise much faster than the

incomes borrowers needed to repay them, and American banks were lending

huge amounts—much more than they had in capital—to emerging countries.

In March 1981, I wrote a Daily Observation entitled “The Next Depression in

Perspective” and concluded it by saying, “The enormity of our debt implies

that the depression will be as bad or worse than that witnessed in the thirties.”

This view was extremely controversial. To most people, “depression” was

a scary word used by kooky and sensationalist people, not something

thoughtful people took seriously. But I had studied debt and depressions back

to 1800, done my calculations, and was confident that the debt crisis led by

emerging countries was coming. I had to share my thinking with my clients.

Because my views were so controversial I asked others to track my reasoning

and point out to me where it was bad. No one could find any flaws in my

logic, though they were all reluctant to endorse my conclusion.

Because I believed that the choice was between accelerating inflation and

deflationary depression, I was holding both gold (which performs well in

accelerating inflation) and bonds (which perform well in deflationary

depressions). Up until that point, gold and bonds had moved in opposite

directions, depending on whether inflation expectations rose or fell. Holding

those positions seemed much safer than holding alternatives like cash, which

would lose value in an inflation environment, or stocks, which would crash in

a depression.

At first, the markets went against me. But my experience with silver and

other trades had taught me that I had a chronic problem with timing, so I

believed I was just early and what I was expecting would happen soon. That

didn’t take long to happen. By the fall of 1981, the tight Fed policies were

having a devastating effect, my bond bets were beginning to pay off, and my

kooky views were starting to look right on. In February 1982, the Fed

temporarily added liquidity to avoid a cash crunch. In June, as the scramble

for liquidity intensified, the Fed responded by printing money, increasing

liquidity to its highest level since Paul Volcker’s appointment. But it still

wasn’t enough.

THE GREATEST WHIPSAW EVER

In August 1982, Mexico defaulted on its debt. By then, it was clear to most

everyone that a number of other countries were about to follow. This was a

huge deal, because U.S. banks had lent about 250 percent of their capital to

other countries just as at risk as Mexico. Business loan activity in the U.S.

ground to a halt.

Because I was one of the few people who had seen these things coming, I

started to get a lot of attention. Congress was holding hearings on the crisis

and invited me to testify; in November I was the featured guest on Wall

$treet Week with Louis Rukeyser, the must-watch show for anyone in the

markets. In both appearances, I confidently declared that we were headed for

depression and explained why.

After Mexico’s default, the Fed responded to the economic collapse and

debt defaults by making money more readily available. This caused the stock

market to jump by a record amount. While that surprised me, I interpreted it

as a knee-jerk reaction to the Fed’s move. After all, in 1929 a 15 percent rally

was followed by the greatest crash of all time. In October, I laid out my

prognosis in a memo. As I saw it, there was a 75 percent chance the Fed’s

efforts would fall short and the economy would move into failure; a 20

percent chance it would initially succeed at stimulating the economy but still

ultimately fail; and a 5 percent chance it would provide enough stimulus to

save the economy but trigger hyperinflation. To hedge against the worst

possibilities, I bought gold and T-bill futures as a spread against eurodollars,

which was a limited-risk way of betting on credit problems increasing.

I was dead wrong. After a delay, the economy responded to the Fed’s

efforts, rebounding in a noninflationary way. In other words, inflation fell

while growth accelerated. The stock market began a big bull run, and over the

next eighteen years the U.S. economy enjoyed the greatest noninflationary

growth period in its history.

How was that possible? Eventually, I figured it out. As money poured out

of these borrower countries and into the U.S., it changed everything. It drove

the dollar up, which produced deflationary pressures in the U.S., which

allowed the Fed to ease interest rates without raising inflation. This fueled a

boom. The banks were protected both because the Federal Reserve loaned

them cash and the creditors’ committees and international financial

restructuring organizations such as the International Monetary Fund (IMF)

and the Bank for International Settlements arranged things so that the debtor

nations could pay their debt service from new loans. That way everyone

could pretend everything was fine and write down those loans over many

years.

My experience over this period was like a series of blows to the head with

a baseball bat. Being so wrong—and especially so publicly wrong—was

incredibly humbling and cost me just about everything I had built at

Bridgewater. I saw that I had been an arrogant jerk who was totally confident

in a totally incorrect view.

So there I was after eight years in business, with nothing to show for it.

Though I’d been right much more than I’d been wrong, I was all the way

back to square one.

At one point, I’d lost so much money I couldn’t afford to pay the people

who worked with me. One by one, I had to let them go. We went down to

two employees—Colman and me. Then Colman had to go. With tears from

all, his family packed up and returned to Oklahoma. Bridgewater was now

down to just one employee: me.

Losing people I cared so much about and very nearly losing my dream of

working for myself was devastating. To make ends meet, I even had to

borrow $4,000 from my dad until we could sell our second car. I had come to

a fork in the road: Should I put on a tie and take a job on Wall Street? That

was not the life I wanted. On the other hand, I had a wife and two young

children to support. I realized I was facing one of life’s big turning points and

my choices would have big implications for me and for my family’s future.

FINDING A WAY PAST MY INTRACTABLE

INVESTMENT PROBLEM

Making money in the markets is tough. The brilliant trader and investor

Bernard Baruch put it well when he said, “If you are ready to give up

everything else and study the whole history and background of the market

and all principal companies whose stocks are on the board as carefully as a

medical student studies anatomy—if you can do all that and in addition you

have the cool nerves of a gambler, the sixth sense of a clairvoyant and the

courage of a lion, you have a ghost of a chance.”

In retrospect, the mistakes that led to my crash seemed embarrassingly

obvious. First, I had been wildly overconfident and had let my emotions get

the better of me. I learned (again) that no matter how much I knew and how

hard I worked, I could never be certain enough to proclaim things like what

I’d said on Wall $treet Week: “There’ll be no soft landing. I can say that with

absolute certainty, because I know how markets work.” I am still shocked

and embarrassed by how arrogant I was.

Second, I again saw the value of studying history. What had happened,

after all, was “another one of those.” I should have realized that debts

denominated in one’s own currency can be successfully restructured with the

government’s help, and that when central banks simultaneously provide

stimulus (as they did in March 1932, at the low point of the Great

Depression, and as they did again in 1982), inflation and deflation can be

balanced against each other. As in 1971, I had failed to recognize the lessons

of history. Realizing that led me to try to make sense of all movements in all

major economies and markets going back a hundred years and to come up

with carefully tested decision-making principles that are timeless and

universal.

Third, I was reminded of how difficult it is to time markets. My long-term

estimates of equilibrium levels were not reliable enough to bet on; too many

things could happen between the time I placed my bets and the time (if ever)

that my estimates were reached.

Staring at these failings, I realized that if I was going to move forward

without a high likelihood of getting whacked again, I would have to look at

myself objectively and change—starting by learning a better way of handling

the natural aggressiveness I’ve always shown in going after what I wanted.

Imagine that in order to have a great life you have to cross a dangerous

jungle. You can stay safe where you are and have an ordinary life, or you can

risk crossing the jungle to have a terrific life. How would you approach that

choice? Take a moment to think about it because it is the sort of choice that,

in one form or another, we all have to make.

Even after my crash, I knew I had to go after the terrific life with all its

risks, so the question was how to “cross the dangerous jungle” without

getting killed. In retrospect, my crash was one of the best things that ever

happened to me because it gave me the humility I needed to balance my

aggressiveness. I learned a great fear of being wrong that shifted my mind-set

from thinking “I’m right” to asking myself “How do I know I’m right?” And

I saw clearly that the best way to answer this question is by finding other

independent thinkers who are on the same mission as me and who see things

differently from me. By engaging them in thoughtful disagreement, I’d be

able to understand their reasoning and have them stress-test mine. That way,

we can all raise our probability of being right.

In other words, I just want to be right—I don’t care if the right answer

comes from me. So I learned to be radically open-minded to allow others to

point out what I might be missing. I saw that the only way I could succeed

would be to:

1. Seek out the smartest people who disagreed with me so I could try to

understand their reasoning.

2. Know when not to have an opinion.

3. Develop, test, and systemize timeless and universal principles.

4. Balance risks in ways that keep the big upside while reducing the

downside.

Doing these things significantly improved my returns relative to my risks,

and the same principles apply in other aspects of life. Most importantly, this

experience led me to build Bridgewater as an idea meritocracy—not an

autocracy in which I lead and others follow, and not a democracy in which

everyone’s vote is equal—but a meritocracy that encourages thoughtful

disagreements and explores and weighs people’s opinions in proportion to

their merits.

Bringing these opposing opinions into the open and exploring them taught

me a lot about how people think. I came to see that people’s greatest

weaknesses are the flip sides of their greatest strengths. For example, some

people are prone to take on too much risk while others are too risk averse;

some are too focused on the details while others are too big-picture. Most are

too much one way and not enough another. Typically, by doing what comes

naturally to us, we fail to account for our weaknesses, which leads us to

crash. What happens after we crash is most important. Successful people

change in ways that allow them to continue to take advantage of their

strengths while compensating for their weaknesses and unsuccessful people

don’t. Later in the book I will describe specific strategies for change, but the

important thing to note here is that beneficial change begins when you can

acknowledge and even embrace your weaknesses.

Over the years that followed, I found that most of the extraordinarily

successful people I’ve met had similar big painful failures that taught them

the lessons that ultimately helped them succeed. Looking back on getting

fired from Apple in 1985, Steve Jobs said, “It was awful-tasting medicine,

but I guess the patient needed it. Sometimes life hits you in the head with a

brick. Don’t lose faith. I’m convinced that the only thing that kept me going

was that I loved what I did.”

I saw that to do exceptionally well you have to push your limits and that, if

you push your limits, you will crash and it will hurt a lot. You will think you

have failed—but that won’t be true unless you give up. Believe it or not, your

pain will fade and you will have many other opportunities ahead of you,

though you might not see them at the time. The most important thing you can

do is to gather the lessons these failures provide and gain humility and radical

open-mindedness in order to increase your chances of success. Then you

press on.

My final lesson was perhaps the most important one, because it has

applied again and again throughout my life. At first, it seemed to me that I

faced an all-or-nothing choice: I could either take on a lot of risk in pursuit of

high returns (and occasionally find myself ruined) or I could lower my risk

and settle for lower returns. But I needed to have both low risk and high

returns, and by setting out on a mission to discover how I could, I learned to

go slowly when faced with the choice between two things that you need that

are seemingly at odds. That way you can figure out how to have as much of

both as possible. There is almost always a good path that you just haven’t

discovered yet, so look for it until you find it rather than settle for the choice

that is then apparent to you.

As difficult as this was, I eventually found a way to have my cake and eat

it too. I call it the “Holy Grail of Investing,” and it’s the secret behind

Bridgewater’s success.

CHAPTER 4

MY ROAD OF TRIALS:

1983–1994

Coming out of my crash, I was so broke I couldn’t muster enough money to

pay for an airplane ticket to Texas to visit a prospective client, even though

the fees I’d earn were many times the cost of the fare—so I didn’t make that

trip. Still, I gradually added clients, revenue, and a new team. With time, my

upswings increased in magnitude and my downswings were both tolerable

and educational. I never thought of what I was doing as building (or

rebuilding) a company; I was just getting the things I needed to play my

game.

Computers were among the most valuable things I acquired, because of

how they helped me think. Without them, Bridgewater would not have been

nearly as successful as it turned out to be.

The first microcomputers (what would later be known as personal

computers) had come on the market during the late 1970s, and I had been

using them as econometricians did, applying statistics and computing power

to economic data to analyze the workings of the economic machine. As I

wrote in a December 1981 article, I believed (and still believe) that

“theoretically . . . if there was a computer that could hold all of the world’s

facts and if it was perfectly programmed to mathematically express all of the

relationships between all of the world’s parts, the future could be perfectly

foretold.”

But I was a long way from doing that. Though my early systems provided

valuable insights into where prices would eventually reach equilibrium, they

hadn’t helped me develop robust trading strategies; they just showed me that

a particular bet would eventually pay off. For example, I’d run through my

analysis and end up with a view that the price of some commodity should be,

say, 75 cents or so. If it was currently 60 cents, I’d know I wanted to buy it,

but I wouldn’t be able to predict that the price would drop to 50 cents before

climbing back to 75, and I wouldn’t know when to buy and sell. Rarely, but

still too often, the system would be dead wrong and I would lose a lot.

“He who lives by the crystal ball is destined to eat ground glass” is a

saying I quoted a lot in those days. Between 1979 and 1982, I had eaten

enough glass to realize that what was most important wasn’t knowing the

future—it was knowing how to react appropriately to the information

available at each point in time. In order to do that, I would have to have a vast

store of economic and market data to draw on—and as it happened, I did.

From very early on, whenever I took a position in the markets, I wrote

down the criteria I used to make my decision. Then, when I closed out a

trade, I could reflect on how well these criteria had worked. It occurred to me

that if I wrote those criteria into formulas (now more fashionably called

algorithms) and then ran historical data through them, I could test how well

my rules would have worked in the past. Here’s how it worked in practice: I

would start out with my intuitions as I always did, but I would express them

logically, as decision-making criteria, and capture them in a systematic way,

creating a mental map of what I would do in each particular situation. Then I

would run historical data through the systems to see how my decision would

have performed in the past and, depending upon the results, modify the

decision rules appropriately.

We tested the systems going as far back as we could, typically more than a

century, in every country for which we had data, which gave me great

perspective on how the economic/market machine worked through time and

how to bet on it. Doing this helped educate me and led me to refine my

criteria so they were timeless and universal. Once I vetted those relationships,

I could run data through the systems as it flowed at us in real time and the

computer could work just as my brain worked in processing it and making

decisions.

The result was Bridgewater’s original interest rate, stock, currencies, and

precious metals systems, which we then combined into one system for

managing our portfolio of bets. Our system was like an EKG on the

economy’s vital signs; as they changed, we changed our positions. However,

rather than blindly following the computer’s recommendations, I would have

the computer work in parallel with my own analysis and then compare the

two. When the computer’s decision was different from mine, I would

examine why. Most of the time, it was because I had overlooked something.

In those cases, the computer taught me. But sometimes I would think about

some new criteria my system would’ve missed, so I would then teach the

computer. We helped each other. It didn’t take long before the computer,

with its tremendous processing power, was much more effective than me.

This was great, because it was like having a chess grandmaster helping me

plot my moves, except this player operated according to a set of criteria that I

understood and believed were logical, so there was no reason for us to ever

fundamentally disagree.

The computer was much better than my brain in “thinking” about many

things at once, and it could do it more precisely, more rapidly, and less

emotionally. And, because it had such a great memory, it could do a better

job of compounding my knowledge and the knowledge of the people I

worked with as Bridgewater grew. Rather than argue about our conclusions,

my partners and I would argue about our different decision-making criteria.

Then we resolved our disagreements by testing the criteria objectively. The

rapidly expanding power of computers during that era was like a constant

stream of gifts from the gods to us. I remember when RadioShack came out

with an inexpensive handheld chess computer; we sent one to each of our

clients with the message, “A Systemized Approach from Bridgewater.” That

little computer chess game could kick my ass on level two out of its nine

levels. It was fun to put it up against each of my clients so they could see how

hard it was to beat computerized decision making.

Of course, we always had the freedom to override the system, which we

did less than 2 percent of the time—mostly to take money off the table during

extraordinary events that weren’t programmed, like the World Trade Center

going down on 9/11. While the computer was much better than our brains in

many ways, it didn’t have the imagination, understanding, and logic that we

did. That’s why our brains working with the computer made such a great

partnership.

These decision-making systems were much better than the forecasting

systems I’d been using before, mostly because they incorporated our ongoing

reactions to developments, allowing us to deal with a wider range of

possibilities. They could also include timing rules. In a January 1987 piece

called “Making Money vs. Making Forecasts,” I explained that:

Truth be known, forecasts aren’t worth very much, and most people who

make them don’t make money in the markets. . . . This is because nothing

is certain and when one overlays the probabilities of all of the various

things that affect the future in order to make a forecast, one gets a wide

array of possibilities with varying probabilities, not one highly probable

outcome. . . . We believe that market movements reflect economic

movements. Economic movements are reflected in economic statistics. By

studying the relationships between economic statistics and market

movements, we’ve developed precise rules for identifying important shifts

in the economic/market environment and in turn our positions. In other

words, rather than forecasting changes in the economic environment and

shifting positions in anticipation of them, we pick up these changes as

they’re occurring and move our money around to keep in those markets

which perform best in that environment.

Over the last three decades of building these systems we have

incorporated many more types of rules that direct every aspect of our trading.

Now, as real-time data is released, our computers parse information from

over 100 million datasets and give detailed instructions to other computers in

ways that make logical sense to me. If I didn’t have these systems, I’d

probably be broke or dead from the stress of trying so hard. We certainly

wouldn’t have done as well in the markets as we have. As you will see later, I

am now developing similar systems to help us make management decisions. I

believe one of the most valuable things you can do to improve your decision

making is to think through your principles for making decisions, write them

out in both words and computer algorithms, back-test them if possible, and

use them on a real-time basis to run in parallel with your brain’s decision

making.

But I’m getting ahead of myself. Let’s go back to 1983.

RESURRECTING BRIDGEWATER

By late 1983, Bridgewater had six employees. Up until then, I hadn’t done

any marketing; the business we got came from word of mouth and from

people reading my daily telexes and seeing my public appearances. But

clearly there was a growing demand for our research, and I realized we could

sell it to supplement our consulting and trading income. So I hired a seventh

employee, a former door-to-door Bible salesman named Rob Fried, and we

hit the road, lugging around a projector and a huge stack of slides, hawking a

$3,000-per-month research package with my daily telexes, weekly conference

calls, biweekly and quarterly research reports, and quarterly meetings. Over

the next year, Rob brought in a number of institutions and institutional

investment managers, including General Electric, Keystone Custodian Funds,

the World Bank, Brandywine, Loomis Sayles, Provident Capital

Management, the Singer Company, Loews Corporation, GTE Corporation,

and Wellington Management.

At that point, our business consisted of three main areas: consulting for

fees, managing companies’ risks for incentive fees, and selling the research

packages. We worked with all sorts of corporate, financial, and government

institutions that had market exposures—banks, diversified international

businesses, commodities producers, food producers, public utilities, and

more. For example, we would build a plan to help a multinational company

deal with the currency exposure it faced from operating in different countries.

My approach was to immerse myself in a business until I got to a point

where I felt that the strategies I was handing off were the ones I would use

were I running the company myself. I would break each company down into

distinct logical components and then come up with a plan for managing each

part, using a variety of financial tools, especially derivative instruments. The

most important components to separate were the profits coming from the core

business and those that were speculative profits and losses coming from price

changes. We would do this to show them what a “risk-neutral” position

would look like, which is to say, the properly hedged position one would take

if one didn’t have a view of the markets. I would advise them to deviate from

this position only when they wanted to speculate, which they should only do

in measured ways and with full knowledge of the effects it could have on

their core business. This approach was eye-opening for most of the firms we

worked with. It gave them clarity and control, and yielded them better results.

Sometimes they wanted us to speculate for them, which we would do for a

share of the profits.

This approach to establishing a “risk-neutral” benchmark position and

deviating from it with measured bets was the genesis of the style of

investment management we would later call “alpha overlay,” in which

passive (“beta”) and active (“alpha”) exposures are separated. The return of a

market (such as the stock market) itself is called its beta. Alpha is the return

that comes from betting against others. For example, some people outperform

the stock market and others underperform it; they are said to have positive or

negative alpha. With alpha overlay, we were offering a way of making bets

independent of underlying market performance. Approaching the market in

this way taught me that one of the keys to being a successful investor is to

only take bets you are highly confident in and to diversify them well.

One of our clients in the mid-1980s was Alan Bond, an audacious

entrepreneur who was one of the richest people in Australia. A self-made

man, he was famous for being the first non-American to win the America’s

Cup yacht race in its then 132-year history. Like Bunker Hunt, he eventually

bet badly and was forced to declare bankruptcy. I advised him and his team

on their way up and stayed on through his downfall, so I watched the tragedy

unfold from up close. His was a classic case of confusing business with

speculation and only hedging when it was too late.

Bond borrowed U.S. dollars to buy assets like breweries in Australia. He

did that because U.S. interest rates were lower than they were in Australia.

Though he didn’t realize it, he was speculating that the U.S. dollar, in which

he would have to pay back his loans, would not rise. When the U.S. dollar did

rise against the Australian dollar in the mid-1980s and his Australian-dollar

beer-sales earnings weren’t enough to pay his debts, his team called me for

advice. I calculated what Bond Corp’s position would be if they hedged on

currencies and saw that doing so would lock in losses that would ruin them,

so I advised them to wait. When the Australian dollar rallied, I advised them

to put the hedges in place, but they didn’t because they believed the currency

problem had gone away. Before long, the Australian dollar plunged to new

lows and they called me in for an emergency meeting. There wasn’t much

they could do without locking in ruinous losses, so they again did nothing,

and this time the Australian dollar didn’t rally. Seeing one of the richest and

most accomplished men on the planet lose everything made a huge

impression on me.

We also did one-off consulting projects related to the markets. In 1985, I

worked with Paul Tudor Jones, a good friend and a great trader, to design a

U.S. dollar futures contract (a tradable index tracking the price of the U.S.

dollar against a basket of foreign currencies) that traded (and still trades) on

the New York Cotton Exchange. I also worked with the New York Futures

Exchange to help design and market their CRB futures contract (a tradable

index that tracks the price of a basket of commodities).

Unlike most people who work in the markets, I never had any desire to

build investment products, especially conventional ones, just because they

would sell well. All I wanted was to trade the markets and build relationships,

doing for our clients exactly what I would do if I were in their shoes. But I

also loved building brand-new things, especially if they were great and

revolutionary. By the mid-1980s, a couple of things were clear to me: First,

we were making good calls in the interest-rate and currency markets, and the

institutional investment managers who were buying our research were using

it to make money. Second, we were successfully managing companies’

interest-rate and currency exposures. With those two things going as well as

they were, I figured we could become successful institutional investment

managers ourselves. So I made the pitch to the people who ran the World

Bank’s pension fund, most importantly Hilda Ochoa, who was its chief

investment officer at the time. Despite the fact that we had no assets under

management and no track record, she gave us a $5 million U.S. bond account

to manage.

That was a huge turning point for us, as it was the start of Bridgewater as

we know it today. The strategy we used for the World Bank shifted between

holding cash and holding twenty-year U.S. Treasury bonds, because these

positions would give us leveraged bets on the direction of interest rates.

When our systems indicated that the pressures on interest rates would cause

them to fall, we would hold twenty-year Treasury bonds, and when the

system pointed to rates rising, we would stay in cash. We did very well, and

before long other large institutional investors gave us money to manage as

well. Mobil Oil and Singer were our next two accounts and others followed

in rapid succession. We went on to become the top-performing U.S. bond

manager in the world.

VENTURING BEHIND THE “CLOSED DOOR” OF

CHINA

Part of what was great about consulting was that it gave me opportunities to

travel. The more unusual a place, the more interesting I found it. This

curiosity drew me to Beijing in 1984. The only images I’d seen of China

when I was growing up were of masses of people waving Mao’s Little Red

Book, so having an opportunity to go behind what was still a mostly “closed

door” was alluring. I got the invitation because I had a small office in Hong

Kong whose director was an advisor to CITIC, the “window company” that

was the only business in China allowed to deal with the outside world.

Beijing was filled with wonderful and incredibly hospitable people who

introduced us to the tradition of drinking shots of Moutai while shouting

Ganbei! (Bottoms up!) and generally showed us a great time. This first trip,

which I made with my wife and a few other people, began an incredibly

rewarding thirty-plus-year journey that has had a profound impact on my

family and me.

There were no financial markets in China at the time; eventually a small

group put together by seven Chinese companies (including CITIC) known as

the Securities Executive Education Council began to develop them. They

started in 1989, just before the Tiananmen Square incident, which set them

back because such market developments were still seen as too capitalist. They

operated out of a small hotel room and hardly had any financing. I can still

picture the big garbage bin under the metal stairway going up to their office. I

really respected the risks these young people were taking by doing this at

such an unsettled time, so I made a small donation to give them a hand and

was excited to share my knowledge with them. From nothing, these people

built China’s markets and the government’s securities regulatory arm.

In 1994, I set up a company called Bridgewater China Partners. By then, I

was convinced that China was poised to become the greatest economy in the

world in the twenty-first century, but hardly anyone was investing in China

yet; good deals could still be struck. I could bring money to the table by

introducing my institutional investment clients to opportunities, and I could

provide know-how by introducing Chinese companies to American ones. In

exchange, we would get a stake in these companies. Essentially, I was setting

up the first U.S.-based private equity firm in China.

I launched the company by bringing a small group of institutional investor

clients, who together managed $70 billion in assets, to China for a visit.

When we got back, we agreed to move forward by setting up a jointly owned

merchant bank in Beijing. While I knew that entering a territory where few

had been before would require a lot of experimentation and learning, I soon

realized I had sorely underestimated the complexity of the task we had set for

ourselves and the amount of time it would take. I found myself constantly on

the phone at three in the morning, trying to make sense of the shaky

accounting and questionable controls at the companies we were interested in

—with all my Bridgewater responsibilities awaiting me when the sun came

up.

After about a year of this, I could see that running both Bridgewater and

Bridgewater China Partners wasn’t going to be possible, so I closed its doors.

Nobody made or lost any money, because I hadn’t been comfortable enough

with what I was seeing to make any investments. I’m sure that if I had

devoted all my time to it, we would have had great success, but then

Bridgewater would not be what it is today. Despite passing up this great

opportunity, I don’t regret my choice. I learned that if you work hard and

creatively, you can have just about anything you want, but not everything you

want. Maturity is the ability to reject good alternatives in order to pursue

even better ones.

While I stepped away from that opportunity, China remained an important

part of my own and my family’s lives. We loved it, especially the people. In

1995, my wife, Barbara, our eleven-year-old son, Matt, and I decided

together that Matt would spend a year in Beijing, attending an all-Chinese

school and living with our friend Madame Gu, who had stayed with us in

America during the Tiananmen Square days and whom Matt had visited in

China with us when he was three. Standards of living in China were very

different from what Matt was accustomed to in Connecticut. For example, the

apartment Madame Gu and her husband lived in had hot water for showers

only twice a week, and the school Matt attended didn’t have heat until well

into the winter, so the students wore their coats in the classrooms. Matt didn’t

speak Chinese and none of his classmates spoke English.

All of this was not just a huge adventure for Matt; it was completely

unprecedented and required special permission from the Chinese government.

I was excited for Matt because I knew he would see a different world and

broaden his mind. Barbara needed a little convincing and a couple of visits to

a child psychologist for reassurance, but she had lived all around the world

herself and knew how it had benefited her, so she was ultimately receptive to

the idea, even if she was less excited about being separated from her son.

Matt’s difficult but life-changing journey profoundly affected his values and

goals. Because he fell in love with China (he says that he became part

Chinese that year) and because he learned the value of empathy relative to the

value of material wealth, he started a charity called China Care to help

Chinese special-needs orphans when he was just sixteen. He ran it for twelve

years (and, to a much lesser degree, still does), while shifting his efforts to

reconceive what computing can be in the emerging world, which he is

executing through his company Endless. I in turn learned a lot from Matt,

especially about the joys of philanthropy, and we both learned the deep

pleasures of great personal relationships. Over the years, I (and in turn

Bridgewater) have also built meaningful relationships with many wonderful

people in China, and we have helped its financial institutions grow from

fledgling organizations to sophisticated giants.

China wasn’t the only country whose people and governments

Bridgewater would become involved with. Through their representatives,

Singapore’s, Abu Dhabi’s, and Australia’s government investment funds, and

Russian and European policymakers, came knocking on our door. The

experiences I have had, the perspectives I gained, and the help I was able to

provide all added up to a package of rewards as large as any of the others that

I got out of my career.

My contact with Singapore’s people and institutions also thrilled me.

There was and still is no leader I admire more than Lee Kuan Yew, who

transformed Singapore from a mosquito-infested backwater to a model

economy. That says a lot, as I have gotten to know and admire several world

leaders. One of my most thrilling moments was a dinner I had with him at my

house in New York, shortly before his death in 2015. Lee requested the

dinner to discuss the state of the world economy. I invited former Fed

chairman Paul Volcker (another hero of mine), former Treasury secretary

Bob Rubin (whose breadth of experiences gave great perspective), and

Charlie Rose (one of the most curious and insightful people I know). Besides

answering his questions, we probed Lee on world affairs and world leaders.

Since he had personally known virtually all of the world’s leaders over the

last fifty years, we asked Lee about the qualities that distinguished the great

ones from the bad ones and what he thought of those who were leading at the

time. He rated Angela Merkel as the best leader in the West and considered

Vladimir Putin one of the best leaders worldwide. He explained that leaders

must be judged within the context of the circumstances they encounter and

then went on to share his view of how difficult it is to lead Russia and why he

thought Putin was doing it well. He also reflected on his unique relationship

with Deng Xiaoping, whom he regarded as the best leader of all.

I love getting to know interesting people from interesting places and

seeing the world through their eyes. This is true whether they are rich or

poor. Seeing life through the eyes of the indigenous people I got to know in

Papua New Guinea was as illuminating for me as gaining the perspectives of

the political and economic leaders, world-changing entrepreneurs, and

cutting-edge scientists I’ve spent time with. I’ll never forget the blind holy

man I met in a mosque in Syria, who explained the Quran and his connection

to God to me. Encounters like these have taught me that human greatness and

terribleness are not correlated with wealth or other conventional measures of

success. I’ve also learned that judging people before really seeing things

through their eyes stands in the way of understanding their circumstances—

and that isn’t smart. I urge you to be curious enough to want to understand

how the people who see things differently from you came to see them that

way. You will find that interesting and invaluable, and the richer perspective

you gain will help you decide what you should do.

MY FAMILY AND MY EXTENDED FAMILY

My family, my extended family of co-workers, and my work have all been

extremely important to me. Juggling work and family has been as much a

challenge to me as to anyone else, especially since I wanted both to be great,

so I combined them whenever I could. For example, I took my kids on

business trips. When at first I brought my son Devon and later Matt to my

Chinese business meetings, our hosts were always very kind—they would

give them cookies and milk. One great memory from Abu Dhabi was when

my clients/friends took my son Paul and me to the desert to eat a freshly

killed and roasted goat with our bare hands. I asked Paul, who was dressed in

the traditional gown they’d given him, how he liked it and he said, “What

could be better than to sit on the floor, dressed in pajamas, eating with my

hands, with nice people?” We all laughed. I remember another time when my

eldest son, Devon, then about 10 years old, brought back silk scarves from

China he’d bought for $1 and sold for $20 in a shopping mall just before

Christmas—which was just the first sign of his business savvy.

By the mid-1980s, Bridgewater had grown to about ten people, so I rented

a big old farmhouse. Bridgewater occupied part of it and my family occupied

the rest. It was extremely informal and family-like: Everyone parked in the

driveway, we met around the kitchen table, and my kids would leave the door

open while they sat on the toilet. The people I worked with would wave as

they walked by.

Eventually, the farm was put up for sale so I bought a barn on the property

and renovated it. My wife, our kids (eventually there were four), and I lived

in a small apartment inside the barn, and I made the unfinished hayloft usable

as an office by putting in electric baseboard heat, which I chose because it

was cheapest to install. It was a great space for parties and there was enough

land for us to play soccer and volleyball and have outdoor barbecues. For our

company Christmas party, we’d have a big potluck dinner with my family.

After a few drinks, Santa would show up and we’d all sit on his lap for a

photo and find out who had been naughty or nice. The night always ended

with a lot of dancing. We also had an annual “Sleaze Day” when everybody

would dress up sleazy. You get the idea: Bridgewater was a small community

of friends who worked hard and partied hard.

Bob Prince joined Bridgewater in 1986 when he was still in his twenties,

and more than thirty years later we are still close partners as co-chief

investment officers. From the very start, Bob and I “played great jazz

together” whenever we’d go back and forth on ideas. We still love doing that

and will until one of us dies. He is also a great teacher, both to clients and co-

workers. Over time, he became like my brother as well as one of the most

critical builders and pillars of Bridgewater.

Soon, Bridgewater began to look like a real company. We outgrew the

barn and moved into a small office in a strip mall; there were twenty of us by

the end of the 1980s. But even as we grew, I never thought of anybody I

worked with as an employee. I had always wanted to have—and to be around

people who also wanted to have—a life full of meaningful work and

meaningful relationships, and to me a meaningful relationship is one that’s

open and honest in a way that lets people be straight with each other. I never

valued more traditional, antiseptic relationships where people put on a façade

of politeness and don’t say what they really think.

I believe that all organizations basically have two types of people: those

who work to be part of a mission, and those who work for a paycheck. I

wanted to surround myself with people who needed what I needed, which

was to make sense of things for myself. I spoke frankly, and I expected those

around me to speak frankly. I fought for what I thought was best, and I

wanted them to do so as well. When I thought someone did something stupid,

I said so and I expected them to tell me when I did something stupid. Each of

us would be better for it. To me, that was what strong and productive

relationships looked like. Operating any other way would be unproductive

and unethical.

MORE BIG TWISTS AND TURNS IN THE

ECONOMY AND MARKETS

1987 and 1988 were filled with more of those big twists and turns that helped

shape me and my approach to life and investing. We were one of the few

investment managers who were short stocks ahead of “Black Monday,”

October 19, 1987, then the largest single-day percentage decline in the

history of the stock market. We got a lot of attention because we were up 22

percent when most others were down a lot. The media dubbed us as among

the “Heroes of October.”

Naturally, I was feeling pretty good going into 1988. I had grown up in an

era of high volatility and had learned that the best way to play it was to get a

hold of a big move and ride it. We used our indicators to catch shifting

fundamentals and our technical trend-following filters to confirm that price

movements were consistent with what the indicators were suggesting. When

they both pointed in the same direction, we had a strong signal; when they

were at odds, we had little or no signal. But as it turned out there was hardly

any volatility in 1988, and so our technical filters whipsawed us and we

ended up giving back a bit more than half our 1987 gains. That stung, but it

also taught us some important lessons and prompted Bob and me to replace

our technical trend-following filter with better value measures and risk

controls.

Until then our systems had been completely discrete—we would flip from

a fully long position to a fully short one when we crossed a predetermined

threshold (much as we switched from bonds to cash for the World Bank). But

we weren’t always equally confident in our views, and we’d also get killed

paying transaction costs when we crossed back and forth. That drove Bob

crazy. I can remember him running laps around the office building to calm

himself down. So at the end of the year, we moved to a more variable system

that allowed us to size our bets in relation to how confident we were. These

and other improvements Bob made to our systems have paid off many times

since.

Not everyone at Bridgewater saw things as Bob and I did. Some in the

company doubted that systemization could work, especially when the

systems didn’t do well, which, like normal decision making, happened every

now and then. It took a lot of reasoning to persuade some of the people I

worked with to press on. But even if I couldn’t convince them, they couldn’t

change my mind, because they couldn’t show me why our approach of

clearly specifying, testing, and systemizing our logic wasn’t preferable to

making decisions less systematically.

All great investors and investment approaches have bad patches; losing

faith in them at such times is as common a mistake as getting too enamored

of them when they do well. Because most people are more emotional than

logical, they tend to overreact to short-term results; they give up and sell low

when times are bad and buy too high when times are good. I find this is just

as true for relationships as it is for investments—wise people stick with

sound fundamentals through the ups and downs, while flighty people react

emotionally to how things feel, jumping into things when they’re hot and

abandoning them when they’re not.

Despite our relatively poor investment performance, 1988 was a great year

for Bridgewater, because by reflecting on and learning from our poor

performance, we made systematic improvements. I have come to realize that

bad times coupled with good reflections provide some of the best lessons, and

not just about business but also about relationships. One has many more

supposed friends when one is up than when one is down, because most

people like to be with winners and shun losers. True friends are the opposite.

I got a lot out of my bad times, not just because they gave me mistakes to

learn from but also because they helped me find out who my real friends

were—the friends who would be with me through thick and thin.

THE NEXT FOOTHOLD FOR BRIDGEWATER

As the 1980s came to an end, we were still a very small company, with just

two dozen employees. Bob introduced me to Giselle Wagner in 1988. She

would be my partner in running the noninvestment side of the business for

twenty years. Dan Bernstein and Ross Waller joined in 1988 and 1989,

respectively, both fresh out of Dartmouth College. At that time, and for quite

a while longer, I tended to hire people just out of school who didn’t have

much experience but were smart, determined, and committed to the mission

of making the company great.

I didn’t value experience as much as character, creativity, and common

sense, which I suppose was related to my having started Bridgewater two

years out of school myself, and my belief that having an ability to figure

things out is more important than having specific knowledge of how to do

something. It seemed to me, young people were creating sensible innovation

that was exciting. Older folks who did things in the old ways held no appeal.

I should add, though, that putting responsibility in the hands of inexperienced

people doesn’t always work out so well. Some painful lessons that you’ll read

about later taught me that it can be a mistake to undervalue experience.

By now, the initial $5 million from the World Bank had grown to $180

million in investments that we were managing for a variety of clients, but we

were still trying to grab a larger foothold in the institutional investment

business. When Rusty Olson, CIO of Kodak’s pension fund, approached us to

solve an investment problem, we jumped at the chance. Rusty was a

remarkable innovator and a man of great character who’d started at Kodak in

1954 and took over its pension fund in 1972; he was widely respected as a

leader in the pension fund world. We’d been sending him our research for a

while, and in 1990 he wrote us looking for our opinion on a big concern of

his. The Kodak portfolio was heavily invested in equities and Rusty was

worried about what would happen in an environment in which the value of

his assets fell badly. He had been trying to come up with a way to hedge

himself against this risk without reducing his expected return.

Rusty’s fax arrived on a Friday afternoon and we leaped into action.

Getting a client this prestigious and innovative would make a big difference

to us. We knew we could do a uniquely great job for Kodak, because we

knew a lot about bonds and financial engineering, and we had a historical

perspective unmatched in the industry. Bob Prince, Dan Bernstein, and I

worked nonstop through the weekend, analyzing the Kodak portfolio and the

strategy Rusty was considering. Then we wrote him a long memo laying out

our thoughts.

Just as I had deconstructed the business of a chicken producer in the 1970s

and many other companies since, we broke down Kodak’s pension fund into

its constituent parts to better understand the “machine.” Our proposed

solutions drew on the portfolio-engineering ideas that would later become

core to Bridgewater’s unique way of managing money. Rusty invited Bob

and me to Rochester, and we came home with the $100 million account. That

was a game changer. Not only did it bring us a lot of credibility, it provided

us with a reliable source of revenue at a time when we needed it.

DISCOVERING THE “HOLY GRAIL OF

INVESTING”

From my earlier failures, I knew that no matter how confident I was in

making any one bet I could still be wrong—and that proper diversification

was the key to reducing risks without reducing returns. If I could build a

portfolio filled with high-quality return streams

that were properly

diversified (they zigged and zagged in ways that balanced each other out), I

could offer clients an overall portfolio return much more consistent and

reliable than what they could get elsewhere.

Decades earlier, the Nobel Prize–winning economist Harry Markowitz had

invented a widely used model that allowed you to input a set of assets along

with their expected returns, risks, and correlations (showing how similarly

those assets have performed in the past) and determine an “optimal mix” of

those assets in a portfolio. But his model didn’t tell you anything about the

incremental effects of changing any one of those variables, or how to handle

being uncertain about those assumptions. By then I was terribly fearful about

what would happen if my assumptions were wrong, so I wanted to understand

diversification in a very simple way. I asked Brian Gold, a recently graduated

math major from Dartmouth who’d joined Bridgewater in 1990, to do a chart

showing how the volatility of a portfolio would decline and its quality

(measured by the amount of return relative to risk) would improve if I

incrementally added investments with different correlations. I’ll explain it in

more detail in my Economic and Investment Principles.

That simple chart struck me with the same force I imagine Einstein must

have felt when he discovered E=mc

: I saw that with fifteen to twenty good,

uncorrelated return streams, I could dramatically reduce my risks without

reducing my expected returns. It was so simple but it would be such a

breakthrough if the theory worked as well in practice as it did on paper. I

called it the “Holy Grail of Investing” because it showed the path to making a

fortune. This was another key moment in our education.

The principle we’d discovered applies equally well to all ways of trying to

make money. Whether you own a hotel, run a technology company, or do

anything else, your business produces a return stream. Having a few good

uncorrelated return streams is better than having just one, and knowing how

to combine return streams is even more effective than being able to choose

good ones (though of course you have to do both). At the time (and still

today), most investment managers did not take advantage of this. They

managed investments in a single asset class: equity managers managed

equities, bond managers managed bonds, and so on. Their clients gave them

money with the expectation that they would receive the overall return of the

asset class (e.g., the S&P 500 stock market index) plus some added returns

from the bets managers took by over- and under-weighting particular assets

(e.g., buying more Microsoft stock than was in the index). But individual

assets within an asset class are generally about 60 percent correlated with

each other, which means they go up or down together more than half the

time. As the Holy Grail chart showed, an equity manager could put a

thousand 60 percent-correlated stocks into their portfolios and it wouldn’t

provide much more diversification than if they’d picked only five. It would

be easy to beat those guys by balancing our bets in the way the chart

indicated.

Thanks to my process of systematically recording my investment

principles and the results they could be expected to produce, I had a large

collection of uncorrelated return streams. In fact, I had something like a

thousand of them. Because we traded a number of different asset classes, and

within each one we had programmed and tested lots of fundamental trading

rules, we had many more high-quality ones to choose from than a typical

manager who was tracking a smaller number of assets and was probably not

trading systematically.

I worked with Bob and Dan to pull our best decision rules from the pile.

Once we had them, we back-tested them over long time frames, using the

systems to simulate how the decision rules would have worked together in

the past.

We were startled by the results. On paper, this new approach improved our

returns by a factor of three to five times per unit of risk, and we could

calibrate the amount of return we wanted based on the amount of risk we

could tolerate. In other words, we could make a ton more money than the

other guys, with a lower risk of being knocked out of the game—as I’d nearly

been before. I called it the “killer system” because it would either produce

killer results for us and our clients or it would kill us because we were

missing something important.

The success of this approach taught me a principle that I apply to all parts

of my life: Making a handful of good uncorrelated bets that are balanced and

leveraged well is the surest way of having a lot of upside without being

exposed to unacceptable downside.

As excited as we were about this new approach, we proceeded cautiously.

We gave the system a 10 percent weight initially and it made money in

nineteen of the twenty months in our test period. As we got more confident, I

decided to reach out to a select group of investors I knew well about

investing in the strategy with $1 million trial accounts. I knew that asking

these institutional investors to invest such relatively modest amounts would

make it hard for them to turn us down. I called the new product “Top 5%” at

first, because it comprised the best 5 percent of our decision rules; later I

changed the name to Pure Alpha to convey that it consisted purely of alphas.

Because Pure Alpha didn’t have any betas, it didn’t have any bias to go up or

down along with any market. Its returns depended only on how good we were

in outperforming others.

Our totally new “alpha overlay” approach allowed investors to receive the

return of their chosen asset class (the S&P 500 stock market, a bond index,

commodities—whatever) plus the return from the portfolio of bets that we

were making across all asset classes. As unprecedented as our approach was,

we explained our logic carefully, showing why it was actually much less

risky than traditional approaches. We also showed them how we expected the

cumulative performance to unfold and what the expected range of

performance around that would be. For our clients, it was a bit like being

presented with the design of a plane that had never flown before but looked

radically better than any other plane on paper. Would anyone be courageous

enough to get on board?

Some clients got the concepts and were excited to change the rules; others

either didn’t understand or worked for organizations that refused to try

cutting-edge things. Frankly, we were thrilled that any of them were willing

to try. For over twenty-six years now, that new type of plane has flown

exactly as we anticipated, making money in twenty-three of these years

(having only modest losses in the other three) and making more money in

total for our clients than any other hedge fund ever. While the investment

management concepts that underlie Pure Alpha eventually changed our

industry, the journey from conception to general acceptance took many years

of learning and grinding work by a group of dedicated partners.

GETTING OUR KILLER SYSTEM OUT INTO THE

WORLD

Pure Alpha represented the best way we knew to actively manage money, but

we also knew that if we wanted to manage a meaningful amount of

institutional money, we had to accept the reality that only a limited number of

innovative clients would try the approach. So while we tried to convince

clients to adopt our way, by the end of the 1990s and into the early 2000s,

Pure Alpha made up only around 10 percent of our total assets under

management.

Even though we couldn’t trade stocks and commodities in our pure bond

accounts, we applied the portfolio structuring principles we’d discovered and

used with Pure Alpha to give our bond clients higher returns at lower levels

of risk. This included trading foreign government bonds, emerging market

debt, inflation-linked bonds, corporate bonds, and the currency exposures that

came with the foreign investments. In our most unconstrained bond

portfolios, we would make about fifty different types of bets, way more than

traditional bond managers traded. Doing so gave us a big edge and landed us

at the top of many investment performance tables year after year.

Our Pure Alpha product was just the first of a number of innovative

designs we brought to our clients. In 1991, we had become the first currency

overlay managers for institutional investors. At the time, institutional

investors were placing larger portions of their portfolios into global equity

and bond markets. While investing internationally added valuable diversity, it

also added unmanaged currency exposure. This was a big problem because

the currency exposures added risk without adding any expected return. We

had traded currencies for years and had developed expertise in portfolio

engineering, so we were in a prime position to solve this problem. Eventually

we became the largest active currency manager in the world.

We also produced several other new and effective ways of managing

money that flew exactly as they were designed. With each one, we gave

clients clearly stated performance expectations expressed in a chart that

showed an accumulated profit line and the expected variations around that

line. We could do this because the systemization of our decision-making

process allowed us to stress-test the performance of our decision making

under a wide variety of conditions.

SYSTEMIZING OUR LEARNING FROM MISTAKES

Of course we continued to make mistakes, though they were all within our

range of expectations. What was great is that we made the most of our

mistakes because we got in the habit of viewing them as opportunities to

learn and improve. One of our most memorable mistakes happened in the

early 1990s, when Ross, who was in charge of trading at the time, forgot to

put in a trade for a client and the money just sat there in cash. By the time the

mistake was discovered, the damage was several hundred thousand dollars.

It was a terrible and costly error, and I could’ve done something dramatic

like fire Ross to set a tone that mistakes would not be tolerated. But since

mistakes happen all the time, that would have only encouraged other people

to hide theirs, which would have led to even bigger and more costly errors. I

believed strongly that we should bring problems and disagreements to the

surface to learn what should be done to make things better. So Ross and I

worked to build out an “error log” in the trading department. From then on,

anytime there was any kind of bad outcome (a trade wasn’t executed, we paid

significantly higher transaction costs than expected, etc.), the traders would

make a record of it and we would follow up. As we consistently tracked and

addressed those issues, our trade execution machine continually improved.

Having a process that ensures problems are brought to the surface, and

their root causes diagnosed, assures that continual improvements occur.

For that reason I insisted that an issue log be adopted throughout

Bridgewater. My rule was simple: If something went badly, you had to put it

in the log, characterize its severity, and make clear who was responsible for

it. If a mistake happened and you logged it, you were okay. If you didn’t log

it, you would be in deep trouble. This way managers had problems brought to

them, which was worlds better than having to seek them out. The error log

(which we now call the issue log) was our first management tool. I learned

subsequently how important tools are in helping to reinforce desired

behaviors, which led us to create a number of tools I will describe later.

This culture of bringing problems and disagreements to the surface

generated a lot of discomfort and conflict, especially when it came to

exploring people’s weaknesses. Before long, things came to a boil.

MY “INTRACTABLE” PEOPLE PROBLEM

One winter day in 1993, Bob, Giselle, and Dan proposed taking me out to

dinner with the stated purpose of “giving Ray feedback about how he affects

people and company morale.” They sent me a memo first, the gist of which

was that my way of operating was having a negative effect on everyone in the

company. Here’s how they put it:

What does Ray do well?

He is very bright and innovative. He understands markets and money

management. He is intense and energetic. He has very high standards

and passes these to others around him. He has good intentions about

teamwork, building group ownership, providing flexible work conditions

to employees, and compensating people well.

What Ray doesn’t do as well:

Ray sometimes says or does things to employees which makes them feel

incompetent, unnecessary, humiliated, overwhelmed, belittled, oppressed,

or otherwise bad. The odds of this happening rise when Ray is under

stress. At these times, his words and actions toward others create

animosity toward him and leave a lasting impression. The impact of this

is that people are demotivated rather than motivated. This reduces

productivity and the quality of the environment. The effect reaches far

beyond the single employee. The smallness of the company and the

openness of communication means that everyone is affected when one

person is demotivated, treated badly, not given due respect. The future

success of the company is highly dependent on Ray’s ability to manage

people as well as money. If he doesn’t manage people well, growth will

be stunted and we will all be affected.

Ugh. That hurt and surprised me. I never imagined that I was having that

sort of effect. These people were my extended family. I didn’t want them to

feel “incompetent, unnecessary, humiliated, overwhelmed, belittled,

oppressed, or otherwise bad.” Why didn’t they tell me directly? What was I

doing wrong? Were my standards too high? For Bridgewater to continue to

be a one-in-ten-thousand–type company we had to have exceptional people

and hold them to extremely high standards. Was I demanding too much?

This looked to me like another one of those fork-in-the-road cases in

which I had to choose between one of two seemingly essential but mutually

exclusive options: 1) being radically truthful with each other including

probing to bring our problems and weaknesses to the surface so we could

deal with them forthrightly and 2) having happy and satisfied employees.

And it reminded me that when faced with the choice between two things you

need that are seemingly at odds, go slowly to figure out how you can have as

much of both as possible. There is almost always a good path that you just

haven’t figured out yet, so look for it until you find it rather than settle for the

choice that is then apparent to you.

My first step was to make sure I knew exactly what the problems were and

how to handle them. So I asked Bob, Giselle, and Dan what they thought was

going on. I learned that they personally, and many others who knew me well,

weren’t as demoralized by me as some others because they understood my

heart was in a good place. If they hadn’t known that they would have quit,

because, as they put it, “I wasn’t paying them enough money to put up with

my crap.”

They knew that I wanted the best for them and Bridgewater, and to get

that I needed to be radically truthful with them and I needed them to be

radically truthful with me. This wasn’t only because it produced better

results, but also because being truthful with each other was fundamental to

how I believed we should be with each other. We agreed that being this way

was essential, but since it was making some people feel bad, something had

to change.

While those people I had contact with understood me, liked me, and in

some cases even loved me, those who had less contact with me were

offended by my directness. It was clear that I needed to be better understood

and to understand others better. I realized then how essential it is that people

in relationships must be crystal clear about their principles for dealing with

each other.

That began our decades-long process of putting our principles into writing,

which evolved into the Work Principles. Those principles were both

agreements for how we would be with each other and my reflections on how

we should handle every situation that came up. Since most types of situations

arose repeatedly with slight variations, these principles were continually

refined. As for our agreements with each other, the most important one was

our need to do three things:

1. Put our honest thoughts out on the table,

2. Have thoughtful disagreements in which people are willing to shift their

opinions as they learn, and

3. Have agreed-upon ways of deciding (e.g., voting, having clear

authorities) if disagreements remain so that we can move beyond them

without resentments.

I believe that for any organization or for any relationship to be great, these

things are required. I also believe that for a group decision-making system to

be effective, the people using it have to believe that it’s fair.

Having our work principles written out and getting in sync about them in

the same way we had with our investment principles were essential for our

understanding each other, especially since our unique way of operating—this

radical truth and radical transparency—that led to our unique results is

counterintuitive and emotionally challenging for some.

Trying to understand how we could get our meaningful work and

meaningful relationships through this straightforwardness led me to speak

with neuroscientists, psychologists, and educators over the decades that

followed. I learned a lot, which I can summarize as follows. There are two

parts of each person’s brain: the upper-level logical part and the lower-level

emotional part. I call these the “two yous.” They fight for control of each

person. How that conflict is managed is the most important driver of our

behaviors. That fighting was the biggest reason for the problems Bob,

Giselle, and Dan raised. While the logical part of people’s brains could easily

understand that knowing one’s weaknesses is a good thing (because it’s the

first step toward getting around them), the emotional part typically hates it.

3 By “return streams,” I mean the returns that come from executing a particular decision

rule—think of them as lines on a chart that track the value of an investment through time,

and the decision to either let it continue to grow in value or sell.

4 This approach is what I call the “5-Step Process.” I’ll dive into it in more detail later on.

5 I’ll explore more on the topic of working with computer-aided decision-making systems

in Chapter Five of Life Principles, Learn How to Make Decisions Effectively.

6 With advances in digital technology, we continue to innovate our methods for recording

and distributing this content.

7 You can find the references to books by Robert Kegan, Edward Hess, and Adam Grant in

the bibliography.

8 Treasury secretary Hank Paulson’s moves, especially putting government money into

systemically important banks, were also crucial.

CHAPTER 5

THE ULTIMATE BOON:

1995–2010

By 1995, Bridgewater had grown to forty-two employees and $4.1 billion

under management, which was more than I’d ever hoped for, especially

considering that Bridgewater had been down to just me only a dozen years

before. While things were much better and more stable, we were still doing

basically the same things I’d been doing from the start—wrestling with the

markets, thinking independently and creatively about how to make our bets,

making mistakes, bringing those mistakes to the surface, diagnosing them to

get at their root causes, designing new and better ways of doing things,

systematically implementing the changes, making new mistakes, and so on.

This iterative, evolutionary approach allowed us to continually refine the

investment systems that I’d begun building in 1982. Back then, we showed

that a few bright guys with computers could beat the big, well-equipped

establishment players. Now we were becoming the well-equipped

establishment ourselves.

As the number of decision rules and the amount of data in our systems

grew more complex, we hired young programmers who were better than us in

converting our instructions into code and smart new grads right out of college

to help with our investment research. One of these new whiz kids, Greg

Jensen, joined Bridgewater as a college intern in 1996. Because he shined, I

grabbed him as my research assistant. Over the decades that followed, he

contributed a lot, grew into the co-chief investment officer role with Bob

Prince and me, and became a co-CEO. He also became like a godson to me.

We also invested in more and more powerful computers.

Having our

systems running through these machines freed us to get above the daily

movements of the markets and consider things from a higher level, where we

could make novel, creative connections that produced innovations for our

clients.

DISCOVERING INFLATION-INDEXED BONDS

Around this time, I had dinner with David White, the man in charge of the

Rockefeller Foundation’s money. David asked me how I would engineer the

foundation’s portfolio to produce a return that was 5 percent above the U.S.

inflation rate. I answered that a portfolio of leveraged foreign inflation-

indexed bonds with the currency hedged back to U.S. dollars should deliver

exactly that. (The bonds needed to be foreign because there were no U.S.

inflation-indexed bonds at the time, and they needed to be hedged to the

dollar so there would be no currency risk.)

Thinking about this later, I realized that we could create an entirely new

and radically different asset class, so Dan Bernstein and I researched such a

portfolio more closely. According to our analysis, this new asset class would

perform even better than we’d thought. In fact, it would be uniquely effective

because we could engineer it to have the same expected return as equities but

with less risk and with a negative correlation with bonds and equities over

long time frames. We showed this research to our clients and they loved it.

Before long, we became the first global inflation-indexed bond manager in

the world. In 1996, U.S. Treasury deputy secretary Larry Summers began

looking into whether the U.S. should issue its own inflation-indexed bonds,

and because we were the only manager with a portfolio of such bonds, he

called us in as experts.

Dan and I traveled down to Washington to meet with Summers, his

Treasury colleagues, and a number of representatives from well-known Wall

Street firms. We were late (punctuality isn’t one of my strengths) and the

doors to the big meeting room at Treasury were locked. I wasn’t going to let

that stop me, so I knocked until someone opened it. It was a large room with

a table in the middle and a press gallery off to the side. There was only one

seat open at the table and it had Dan’s nameplate in front of it—we’d agreed

that he’d be our one allowed representative since he’d done a lot of the prep

work. I had forgotten that, so I walked over to the press gallery, grabbed a

chair, and carried it next to Dan’s so I had a seat at the table too. Dan

describes that meeting as an analogy for what it was like for us in the 1990s

in general: We had to barge our way into things. Larry Summers has since

said that the advice he got from us was the most important in shaping this

market. When the Treasury did create the bonds, they followed the structure

we recommended.

DISCOVERING RISK PARITY

By the mid-1990s, I had enough money to set up a trust for my family, so I

began to think about what the best asset allocation mix for preserving wealth

over generations would look like. In my years as an investor, I had seen all

sorts of economic and market environments and all kinds of ways that wealth

could be created and destroyed. I knew what drove asset returns, but I also

knew that no matter what asset class one held, there would come a time when

it would lose most of its value. This included cash, which is the worst

investment over time because it loses value after adjusting for inflation and

taxes. I also knew how difficult it was to anticipate the swings that cause

those losses. I’ve devoted my life to it and I’ve made my share of bad calls;

anticipating these swings wasn’t something I’d bet on others doing well when

I wasn’t around. Finding investors who have done well in all economic

environments—when inflation rises and when it falls, when there are booms

and when there are busts—is like finding needles in a haystack, and they

don’t live forever so that’s not a viable path. I didn’t want the wealth I had

created to protect my family to be wiped out after I was gone. That meant I

had to create a mix of assets that could be good in all economic

environments.

I knew which shifts in the economic environment caused asset classes to

move around, and I knew that those relationships had remained essentially

the same for hundreds of years. There were only two big forces to worry

about: growth and inflation. Each could either be rising or falling, so I saw

that by finding four different investment strategies—each one of which

would do well in a particular environment (rising growth with rising

inflation, rising growth with falling inflation, and so on)—I could construct

an asset-allocation mix that was balanced to do well over time while being

protected against unacceptable losses. Since that strategy would never

change, practically anyone could implement it. And so, with help from Bob

and Dan, I created a portfolio mix that I could comfortably put my trust

money in for the next hundred or more years. I called it the “All Weather

Portfolio” because it could perform well in all environments.

Between 1996 and 2003 I was the only “client” investing in it because we

didn’t sell it as a product. But in 2003, the head of Verizon’s pension fund, a

longtime client, told us he was looking for an approach to investing that

would do well across all environments. After Verizon made its investment,

others quickly followed, and a dozen years later we were managing nearly

$80 billion. It was another industry-shaping concept. Seeing its success, other

investment managers followed with their own versions. It is now generically

called “risk parity” investing.

TO REMAIN A BEAUTIFUL BOUTIQUE OR

BECOME A GREAT INSTITUTION?

With our people and culture producing these industry-shaping investment

products, Bridgewater really took off. By 2000, we were managing more than

$32 billion, almost eight times what we had been managing just five years

before. Our head count had doubled, so we moved out of our strip mall office

into a larger space situated in a nature preserve on the banks of the Saugatuck

River. But while we continued to grow, it was never clear sailing. Building

the business while managing investments required me to do two challenging

jobs simultaneously and develop two distinct skill sets, while being a good

father, husband, and friend. The demands of these roles changed over time,

so the skills and abilities I needed changed as well.

Most people assume that the challenges that go along with growing a large

business are greater than those of growing a smaller one. That is not true.

Going from a five-person organization to a sixty-person organization was just

as challenging as going from a sixty-person organization to a seven-hundred-

person organization—and from a seven-hundred-person organization to a

1,500-person one. Looking back, I can’t say that the challenges were easier or

harder at any of the various phases we went through. They were just

different. For example, when I had no one to manage, I had the challenge of

having to do almost everything myself. When I learned and earned enough to

pay others, I had the challenge of managing them. Similarly, the challenges

of wrestling with market and economic swings were constantly changing. I

didn’t think about it then, but it’s obvious to me now that while one gets

better at things over time, it doesn’t become any easier if one is also

progressing to higher levels—the Olympic athlete finds his sport to be every

bit as challenging as the novice does.

Very soon we faced another critical choice: What kind of company did we

want to have? Should we continue to grow or stay about the same size?

By 2003, I had come to believe that we needed to grow Bridgewater into a

real institution instead of remaining a typical boutique-sized investment

manager. Doing this would make us better in many ways—better technology,

better security controls, a deeper talent pool—all of which would make us

more stable and permanent. This meant hiring more people in technology,

infrastructure, and other areas, as well as additional HR and IT staff to train

and support them.

Giselle argued strongly that we should not grow. She believed that

introducing a lot of new people would threaten our culture, and that the time

and attention that hiring, training, and managing them required would dilute

our focus. While I agreed with her points, I didn’t like the alternative of not

allowing ourselves to become all we could be. I felt about this fork-in-the-

road choice the way I felt about most others—that whether or not we could

have our cake and eat it too was merely a test of our creativity and character.

For example, I could envision ways in which technology would help us get

the most out of people. After a fair amount of wrestling with these questions,

we decided to go ahead.

FLESHING OUT PRINCIPLES

Ever since Bob, Giselle, and Dan had presented me with the “Ray Feedback

Memo” in the 1990s, I had been much more explicit in writing down and

sharing my work principles in the same way I had written down my

investment principles. At first, this took the form of shared philosophy

statements and emails to the entire company. Then, whenever something new

came along that required me to make a decision, I would reflect on my

criteria for making that decision and write it down as a principle so people

could make the connections between the situation, my principle for handling

these situations, and my actions. More and more, we saw everything as

“another one of those”—another of a certain type of situation like hiring,

firing, determining compensation, dealing with dishonesty—that had

principles for handling them. By having them explicitly written out, I could

foster the idea meritocracy by having us together reflect on and refine those

principles—and then adhere to them.

The number of principles started small and grew over time. By the mid-

2000s, Bridgewater was beginning to grow rapidly, and we had a number of

new managers trying to learn and adapt to our unique culture—and who were

increasingly asking me for advice. I was also beginning to have people from

outside Bridgewater ask me how they could create idea meritocracies of their

own. So in 2006, I prepared a rough list of about sixty Work Principles and

distributed them to Bridgewater’s managers so they could begin to evaluate

them, debate them, and make sense of them for themselves. “It’s a rough

draft,” I wrote in the covering memo, “but it is being put out now for

comments.”

This began an ongoing evolutionary process of encountering many

situations, forming principles about how to deal with them, and getting in

sync with other Bridgewater leaders and managers about them. Over time, I

encountered most everything there is to encounter in running a company, so I

had a few hundred principles that covered most everything. That collection of

principles, like our collection of investment principles, became a kind of

decision-making library. Those principles are the basis of what you’ll find in

Work Principles.

But it wasn’t enough to codify and teach our philosophy; we had to live it.

As the company grew bigger, how that happened evolved. In Bridgewater’s

early days, everyone knew each other, so being radically transparent was easy

—people could attend the meetings they wanted to and communicate with

each other informally. But as we grew, that became logistically impossible,

which was a real problem. How could people engage productively with the

idea meritocracy if they didn’t know everything that was going on? Without

transparency, people would spin whatever happened to suit their own

interests, sometimes behind closed doors. Problems would be hidden instead

of brought to the surface where they could be resolved. To have a real idea

meritocracy, there must be transparency so that people can see things for

themselves.

To make sure this happened, I required that virtually all our meetings be

recorded and made available to everyone, with extremely rare exceptions

such as when we were discussing very private matters like personal health or

proprietary information about a trade or decision rule. At first I sent these

tapes of management meetings unedited to the entire company, but that was a

huge burden on people’s time. So I built a small team to edit the tapes,

focusing on the most important moments, and over time we added questions

to create “virtual reality” case studies that could be used for training.

Over

time, these tapes became part of a “boot camp” for new employees as well as

a window into an ongoing stream of situations connected to the principles for

handling them.

All this openness led to some very frank discussions about who did what

and why, and as a result we were able to deepen our understanding of our

different ways of thinking. This was enlightening to all of us in showing how

differently people’s brains worked. If nothing else, I could better appreciate

people I’d once wanted to strangle! Moreover, I recognized that managers

who do not understand people’s different thinking styles cannot understand

how the people working for them will handle different situations, which is

like a foreman not understanding how his equipment will behave. That

insight led us to explore psychometric testing as a way of learning how

people think differently.

DISCOVERING PSYCHOMETRIC TESTING

Early in my kids’ lives, I’d had them tested by a brilliant psychologist named

Sue Quinlan. Her assessments proved spot-on and provided a great road map

for how they would develop over the years. Because that testing process had

been so successful, I worked with her and others to try to identify the best

tests for determining what the people I worked with were like. In 2006, I took

the Myers-Briggs Type Indicator (MBTI) assessment for the first time and

found its description of my preferences to be remarkably accurate.

Many of the differences it described, such as those between “intuiting

people,” who tend to focus on big-picture concepts, and “sensing people,”

who pay more attention to specific facts and details, were highly relevant to

the conflicts and disagreements we were having at Bridgewater. I began to

look for other tests that could help us deepen our understanding of each other.

This was slow going at first, largely because most of the psychologists I met

were surprisingly squeamish about exploring differences. But eventually I

found a few great people, especially a psychologist named Bob Eichinger,

who pointed me to a number of other very useful tests.

In early 2008, I had most of Bridgewater’s managers take the Myers-

Briggs assessment. The results astounded me. I couldn’t believe that some of

them actually thought in the ways the test described, yet when I asked them

to rate how well it described them on a scale of one to five, more than 80

percent of them gave it a four or five.

CREATING BASEBALL CARDS

Even after we were armed with the Myers-Briggs data and other tests we’d

taken, I found that we were still having a hard time connecting the dots

between the outcomes that we were seeing and what we knew about the

people producing them. Over and over again, the same people would walk

into the same meetings, do things the same ways, and get the same results

without seeking to understand why. (Recently I came across a study that

revealed a cognitive bias in which people consistently overlook the evidence

of one person being better than another at something and assume that both are

equally good at a task. This was exactly what we were seeing.) For example,

people who were known not to be creative were being assigned tasks that

required creativity; people who didn’t pay attention to details were being

assigned to detail-oriented jobs, and so on. We needed a way to make the

data that showed what people were like even clearer and more explicit, so I

began making “Baseball Cards” for employees that listed their “stats.” The

idea was that they could be passed around and referred to when assigning

responsibilities. Just as you wouldn’t have a great fielder with a .160 batting

average bat third, you wouldn’t assign a big-picture person a task requiring

attention to details.

At first, this idea met a lot of resistance. People were concerned that the

Baseball Cards wouldn’t be accurate, that producing them would be too time-

consuming, and that they would only succeed in pigeonholing people

unfairly. But over time, everyone’s attitudes toward this approach of openly

exploring what people are like shifted 180 degrees. Most people found that

having this information out in the open for everyone to see was more

liberating than constraining because when it became the norm, people gained

the sort of comfort that comes with just being themselves at work that family

members have with each other at home.

Because this way of operating was so unusual, a number of behavioral

psychologists came to Bridgewater to evaluate it. I urge you to read their

assessments, which were overwhelmingly favorable.

The Harvard

psychologist Bob Kegan called Bridgewater “a form of proof that the quest

for business excellence and the search for personal realization need not be

mutually exclusive—and can, in fact, be essential to each other.”

I should also explain that my personal circumstances at the time also drew

me to psychology and neurology. While for the most part I am keeping my

family members’ lives out of this book to protect their privacy, I will tell you

this one story about my son Paul as it is relevant and he is open about it.

After graduating from NYU’s Tisch film school, Paul headed out to Los

Angeles to take a job. One day he went to the front desk of the hotel where he

was staying while he looked for an apartment and smashed their computer.

He was arrested and thrown in jail, where he was beaten up by guards.

Ultimately, he was diagnosed with bipolar disorder, released into my custody,

and admitted to the psychiatric ward of a hospital.

That was the beginning of a three-year roller-coaster ride that took Paul,

Barbara, and me to the peaks of his manias and the depths of his depressions,

through the twists and turns of the health care system, and into discussions

with some of the most brilliant and caring psychologists, psychiatrists, and

neuroscientists at work today. There is nothing to prompt learning like pain

and necessity, and this gave me plenty of both. At times I felt as though I was

holding Paul by the hand as he was dangling over a cliff—from one day to

the next, I never knew whether I could hold on or if he would slip from my

grip. I worked intensely with his caregivers to understand what was going on

and what to do about it. Thanks both to the help he received and his own

great character, Paul worked through this and is now better off than if he

hadn’t fallen into his abyss, because he developed strengths he didn’t have

but needed. Paul was once wild—staying out till all hours, disorganized,

smoking marijuana and drinking—but he now faithfully takes his meds,

meditates, goes to bed early, and avoids drugs and alcohol. He had loads of

creativity but lacked discipline. Now he has plenty of both. As a result, he is

more creative now than he was before and is happily married, the father of

two boys, an accomplished filmmaker, and a crusader helping those who

struggle with bipolar disorder.

His radical transparency about being bipolar and his commitment to

helping others with it inspires me. His first feature film, Touched with Fire,

which received lots of acclaim, gave many people who might have lost their

lives to bipolar disorder both the hope and the path forward they needed. I

remember watching him shoot one scene based on a real conversation

between us in which he was manic and I was struggling to reason with him. I

could simultaneously see the actor playing Paul at his worst while the real

Paul was at his best, directing the scene. As I watched, my mind flashed over

his whole journey—from the depths of his abyss, through his metamorphosis

into the strong hero standing in front of me, someone on a mission to help

others going through what he had gone through.

That journey through hell gave me a much deeper understanding of how

and why we see things differently. I learned that much of how we think is

physiological and can be changed. For example, Paul’s wild swings were due

to the inconsistent secretions of dopamine and other chemicals in his brain, so

he could change by controlling those chemicals and the activities and stimuli

affecting them. I learned that creative genius and insanity can be quite close

to each other, that the same chemistry that creates insights can cause

distortions, and that being stuck in one’s own head is terribly dangerous.

When Paul was “crazy,” he always believed his own illogical arguments, no

matter how strange they sounded to others. While more extreme in the case

of someone with bipolar disorder, this is something I’ve seen most everyone

do. I also learned how people can control how their brains work to produce

dramatically better effects. These insights helped me to deal with people

more effectively, as I will explain in detail in Chapter Four, Understand That

People Are Wired Very Differently.

MAKING BRIDGEWATER ROCK-SOLID AND

CUTTING-EDGE

At our annual town hall meeting in June 2008, I said that seen through my

eyes Bridgewater was then, and always had been, “both terrible and terrific at

the same time.” After about five years of rapid growth toward building

Bridgewater as an institution, we had encountered our newest set of

problems. This was nothing new. Since I started Bridgewater we always had

some problems because we were always doing bold new things, making

mistakes, and evolving quickly. For example, technology had changed so

quickly during the years we’d built the company that we had literally

switched from using slide rules to spreadsheet software to advanced artificial

intelligence. With so much changing so fast, it had seemed pointless to focus

on getting everything “just right” when something newer and better was sure

to come along. So we built our technology in a light and flexible way, which

made sense at the time but also created a number of hairballs that badly

needed untangling. That same approach of moving quickly and flexibly had

been true throughout the company, so several departments had become

overstretched as we grew. It had always been fun being cutting-edge, but we

were having a hard time becoming rock-solid, especially in the

noninvestment side of the business. The organization needed to be renovated

in several ways—but it wasn’t going to be easy.

In 2008 I was working about eighty hours a week doing my two full-time

jobs (overseeing our investments and overseeing the company), and in my

opinion not doing well enough at either. I felt that I, and the company more

broadly, were slipping from being pervasively excellent. From the get-go I

had toggled acceptably between investment management and business

management. But now that we were a bigger company, the business

management side was demanding much more time than I had to give it. I

conducted a time-and-motion study of all of my investment and management

responsibilities; it showed it would take me about 165 hours a week to

achieve the level of excellence that I would be satisfied with in overseeing

both our investments and management. That was obviously impossible. Since

I wanted to delegate as much as possible, I asked whether the things I was

doing could be done excellently by others, and if so, who those others were.

Everyone agreed that most of those areas couldn’t adequately be delegated. I

clearly hadn’t done a good enough job of finding and training others to whom

I could delegate my responsibilities.

To me, the greatest success you can have as the person in charge is to

orchestrate others to do things well without you. A step below that is doing

things well yourself, and worst of all is doing things poorly yourself. As I

reflected on my position, I could see that despite all of my and Bridgewater’s

amazing achievements, I had not achieved this highest level of success. In

fact, I was still struggling to achieve the second-highest level (doing things

well myself), even though Bridgewater was extremely successful.

At the time, there were 738 people working at Bridgewater, with fourteen

department heads. I oversaw the department heads, along with a Management

Committee I’d created because I knew I couldn’t trust myself to know what

was best without others probing me. I had structured the reporting lines so

that I both reported to the Management Committee and held its members

accountable for their oversight of the company. I wanted them to also own

the responsibility of producing pervasive excellence and I wanted to be at

their service in helping them achieve it.

In May 2008, I wrote an email to the five members of the Management

Committee, copying the company, telling them that “I am escalating to let

you know that I have reached my limits and that the quality of my work, and

my work-life balance, are both suffering unacceptably.”

THE FINANCIAL AND ECONOMIC CRISIS OF 2008

Recognizing that I was stretched wouldn’t by itself be enough to slow the

flow of things coming at me, especially in the investment area at what proved

to be a time of historic turbulence.

Because too often I had been painfully surprised by different types of

events that hadn’t happened to me before but happened in other times or

other places—like the currency devaluation of 1971, or the debt crisis in the

early 1980s—I’d developed our economic and market principles to be

timeless and universal. In other words, I knew that we needed to understand

all important economic and market movements, not just those that happened

to me, and to make sure the principles we were using to position ourselves

would have worked in all past times and all other countries.

As a result, back in the early 2000s, we had included a “depression gauge”

in our systems that specified the actions we should take if a certain

configuration of events began to play out in a way indicating a heightened

risk of a debt crisis and depression. In 2007, this gauge indicated that a

bubble of debt was nearing its bursting point because the costs of debt service

were outpacing projected cash flows. Because interest rates were so close to 0

percent, I knew that central banks could not ease monetary policy enough to

reverse the downturn the way they had in prior recessions. This was the exact

configuration that had led to past depressions.

My mind and gut flashed back to my 1979–82 experience. I was now both

thirty years more knowledgeable and a whole lot less confident. While the

dynamic in the economy seemed clear to me, I was much less sure I was

right. I remembered how clearly it had seemed to me that the debt bust I’d

been expecting in 1982 would sink the economy—and how painfully wrong I

had turned out to be.

That experience also drove me to learn a lot more about debt crises and

their effects on the markets, and I researched and traded through a number of

them, including the Latin American debt crisis in the 1980s, the Japanese

debt crisis of the 1990s, the blowup of Long-Term Capital Management in

1998, the bursting of the dot-com bubble in 2000, and the fallout from the

attacks on the World Trade Center and Pentagon in 2001. With the help of

my teammates at Bridgewater, I took history books and old newspapers and

went day by day through the Great Depression and the Weimar Republic,

comparing what happened then with what was happening in the present. The

exercise only confirmed my worst fears: It seemed inevitable to me that large

numbers of individuals, companies, and banks were about to have serious

debt problems and that the Federal Reserve couldn’t lower interest rates to

cushion the blow, as was the case in 1930–32.

My fear of being wrong pushed me to seek out other smart folks to poke

holes in my view. I also wanted to walk key policymakers through my

thinking, both to stress-test it and to make them aware of the situation as I

saw it, so I went to Washington to speak with people in both the U.S.

Treasury and the White House. Though they were polite, what I was

presenting seemed too far-fetched to them, especially when by all outward

indications the economy seemed to be booming. Most of them didn’t go very

deep into our reasoning or calculations before they dismissed them, with one

exception: Ramsen Betfarhad, Vice President Dick Cheney’s deputy assistant

of domestic policy. He worked through all our numbers and was concerned

by them.

Because everything we saw lined up and we couldn’t find anyone who

could refute our views, we prepared our clients’ portfolios by balancing our

positions in a way that there would be considerable upside and limited

downside in the portfolios if we were right and putting in a backup plan in

case we were wrong. Though we thought we were well prepared, we were as

worried about being right as we were about being wrong. The prospect of the

world economy going over a waterfall was scary to all of us because of what

it might mean to those who weren’t protected.

As in 1982, when conditions deteriorated and circumstances increasingly

transpired as we’d predicted, policymakers began to pay more attention to us.

Betfarhad had me come to the White House to meet with him. Tim Geithner,

president of the New York Fed, asked to see me as well. I brought Bob, Greg,

and a young analyst named Bob Elliott to a lunch meeting with Geithner. We

walked him through the numbers and he literally turned white. When he

asked me where we’d gotten them from, I told him they were publicly

available. We’d just put them together and looked at them in a different way.

Two days after our meeting with Geithner, Bear Stearns collapsed. That

didn’t trigger much worry for most people or for the markets, though it was a

sign of what was to come. It wasn’t until six months later in September, when

Lehman Brothers collapsed, that everyone else connected the dots. At that

point the dominoes fell fast, and though they couldn’t contain all the damage,

policymakers, most importantly Fed chairman Ben Bernanke, reacted

brilliantly to create “a beautiful deleveraging” (i.e., a way of lowering debt

burdens while keeping economic growth positive and inflation low).

To make this long story short, we navigated this period well for our

clients, anticipating market moves and avoiding losses. Our flagship fund

made over 14 percent in 2008, a year when many other investors recorded

losses of more than 30 percent. We would have done even better had we not

feared being wrong, which led us to balance our bets instead of arrogantly

and foolishly putting more chips at stake. But I had no regrets because I had

learned that it wasn’t smart to bet that way. While in this case we would have

made more money if we were less balanced, we certainly wouldn’t have

survived and succeeded long enough to be in such a position if we’d

approached our investments in that way.

The 2008 debt crisis was another one of those like the one in 1982, which

were both like many more before them and many more that will come. I

enjoyed reflecting back on my painful mistakes and the value of the

principles they gave me. When the next big one comes along in twenty-five

years or so, or who knows when, it will probably come as a surprise and

cause a lot of pain unless those principles are properly encoded in algorithms

put into our computers.

HELPING POLICYMAKERS

Our economic and market principles were very different from most others,

which accounted for our different results. I will explain these differences in

Economic and Investment Principles and won’t digress into them now.

As former Fed chairman Alan Greenspan put it, “The models failed at a

time when we needed them most . . . JP Morgan had the American economy

accelerating three days before [the Lehman Brothers’ collapse]—their model

failed. The Fed model failed. The IMF model failed . . . So that left me asking

myself: What happened?” Bill Dudley, president of the New York Fed,

homed in on the problem when he said, “I think there’s a fundamental

problem in terms of how macroeconomists look at the economic outlook,

growth, and inflation . . . If you look at the big macro models, they don’t have

a financial sector typically in them. They don’t admit the possibility that the

financial sector could essentially melt down, and therefore the monetary

policy impulse could be completely impaired. So I think the lesson of the

crisis is to do a lot more work to make sure that the finance people are talking

to the macroeconomist people and building models that are more robust.” He

was right. We “finance people” see the world very differently from the way

economists do. As a result of our success, policymakers reached out to us

more, which led me to have a lot more contact with senior economic

policymakers in the U.S. and around the world. Out of respect for the privacy

of our conversations, I won’t say much about them except to note that they

became much more open to our nontraditional ways of looking at economies

and markets, and more skeptical about traditional economic thinking, which

had failed to either signal or avert the crisis.

Most of our exchanges were one-sided; I generally answered their

questions and didn’t ask any that would put them in the awkward position of

having to avoid answering for fear of compromising confidential information.

I met with these leaders without making judgments and without regard for

their particular ideologies. I approached them like a doctor, just wanting to

make the most beneficial impact.

They wanted my help because my global macroeconomic perspective as

an investor was very different from theirs as policymakers. We were both

products of our environments. Investors think independently, anticipate

things that haven’t happened yet, and put real money at stake with their bets.

Policymakers come from environments that nurture consensus, not dissent,

that train them to react to things that have already occurred, and that prepare

them for negotiations, not placing bets. Because they don’t benefit from the

constant feedback about the quality of their decisions that investors get, it’s

not clear who the good and bad decision makers among them are. They also

have to be politicians. Even the most clear-sighted and capable policymakers

must constantly divert their attention from the immediate problems they are

dealing with to fight the objections of other policymakers, and the political

systems they must navigate are often dysfunctional.

While the economic machine is more powerful than any political system

in the long run (ineffective politicians will be replaced and incapable political

systems will change), the interaction between the two is what drives

economic cycles in the here and now—and it’s often not pretty to watch.

MAKING GREAT RETURNS

Our returns in 2010 were the best ever—nearly 45 and 28 percent in our two

Pure Alpha funds and close to 18 percent in All Weather—almost exclusively

because the systems we had programmed to take in information and process

it were doing it superbly. These systems worked far better than we could with

just our brains. Without them, we would have had to manage money the old

and painful way: by trying to weigh in our heads all the markets and all the

influences on them and then bring them together into a portfolio of bets. We

would have had to hire and supervise a bunch of different investment

managers, and because we couldn’t have blind faith in them, we’d have had

to understand how each one made their decisions, which would mean

watching what they were doing and why so we could know what to expect

from them, while dealing with all their different personality issues. Why

would I want to do that? It seemed to me that that way of investing or

managing an organization was obsolete, like reading a map instead of

following a GPS. Of course, building our system was hard work—it had

taken us over thirty years to do it.

Having too much money to manage can hurt performance, since the costs

of getting in and out of positions can be high because being too big can push

the markets. Making over 40 percent in 2010 had put us in the position of

having to return a lot of money to clients who actually wanted to give us

more to manage. We were always careful to stay safely short of being too

big, lest we kill the goose that lays the golden eggs.

Our clients didn’t want their money back—they wanted us to grow it. So

we were presented with the puzzle of how to maximize our capacity without

hurting our performance. We hadn’t looked at that before, because we’d

never had that much money. We quickly discovered that if we just tweaked

what we did and created a new fund that managed money the same way as

Pure Alpha but invested it solely in the most liquid markets, our expected

returns would be the same and the expected risk (i.e., volatility) only slightly

higher.

We programmed this new approach into our computers, back-tested it to

see how it worked in all countries and time frames, and explained it to our

clients in detail so they could thoroughly understand the logic behind it. As

much as I love and have benefited from artificial intelligence, I believe that

only people can discover such things and then program computers to do

them. That’s why I believe that the right people, working with each other and

with computers, are the key to success.

Toward the end of the year, we opened “Pure Alpha Major Markets” and

clients invested $15 billion in it. Since then its returns have been as expected

—that is, about the same as Pure Alpha’s (actually better, but only slightly).

Our clients were delighted. In fact, this new option was so popular that by

2011 we had to close it to new investment too.

GOING FROM BELOW THE RADAR TO ABOVE IT

Success is a double-edged sword—as I learned after we anticipated the

financial crisis and Bridgewater and I began to receive unwanted public

attention. Our unusual performance, our unusual way of looking at

economics and markets, and our unusual culture made us a continuing subject

of interest. I wanted to stay under the radar so I avoided interacting with the

press. That didn’t stop the press from writing about me and Bridgewater,

which they typically did in a sensationalistic way—either painting me as a

superhero investor who walked on water or as a leader of a cult, and

sometimes both.

Getting a lot of attention for being successful is a bad position to be in.

Australians call it the “tall poppy syndrome,” because the tallest poppies in a

field are the ones most likely to have their heads whacked off. I didn’t like

the attention and I especially didn’t like the mischaracterizations of

Bridgewater as a cult, because I felt it was hurting our ability to recruit great

people. At the same time, I realized that because we didn’t let the media see

how we truly operated inside Bridgewater, those sensational portrayals were

unavoidable.

So I decided in late 2010 to make public my Principles—which explained

exactly what we were doing and why. I put it on our website so it could be

read freely and understood by people outside the company.

Doing that was a hard decision, but it turned out to be a great one. Most

people got it and many beyond Bridgewater benefited from reading them.

More than three million people have downloaded Principles; some even had

it translated into their own languages at their own expense. I’ve received a

large number of thank-you notes from people who said that reading

Principles had changed their lives.

PREPARING BRIDGEWATER TO SUCCEED

WITHOUT ME

Since I was a kid, I’ve learned by doing. I’d just dive in after things I wanted

and try to survive long enough to learn from my mistakes and improve. If I

changed fast enough to become sustainable at whatever I was doing, then I

would build on that to flourish. I’ve always had great faith in my ability to

figure things out, and over time my need to figure things out made me better

at doing so. As a result, I tended to hire people who were the same way—

who would dive right into challenges, figure out what to do about them, and

then do it. I figured that if they had great character, common sense, and

creativity, and were driven to achieve our shared mission, they would

discover what it took to be successful if I gave them the freedom to figure out

how to make the right decisions. I knew that micromanaging and handcuffing

them wouldn’t work because neither of us would like it. If I was the one

telling them what to do, I wouldn’t be getting any leverage from them.

Besides, I didn’t want to work with people who needed that.

But starting in the 1990s, I began to recognize the emotional barriers most

people had to looking at their problems and weaknesses forthrightly. Rather

than embracing ambiguous situations and difficult challenges, they tended to

get uncomfortable when facing them. It is the rare bird who has the right mix

of common sense, creativity, and character to shape change. Almost everyone

needs help before they can get there. So I wrote down my principles and the

logic behind them and shared them, hoping they could be used by those who

thought they were good and debated openly by those who didn’t. I figured

that over time we would all get in sync about how particular situations should

be handled.

But while almost all of us quickly agreed on the principles intellectually,

many still struggled to convert what they had agreed to intellectually into

effective action. This was because their habits and emotional barriers

remained stronger than their reasoning. The training and the virtual-reality

tapes helped a lot, but they still weren’t enough.

No matter how much effort we put into screening new hires and training

them to work in our idea meritocracy, it was inevitable that many of them

would fall short. My approach was to hire, train, test, and then fire or

promote quickly, so that we could rapidly identify the excellent hires and get

rid of the ordinary ones, repeating the process again and again until the

percentage of those who were truly great was high enough to meet our needs.

But for this to work, we needed people with high standards who wouldn’t

hesitate to eliminate people who couldn’t cut it. Many new employees (and

some older ones) still were reluctant to probe hard at what people were like,

which made things worse. It’s tough to be tough on people.

Of course, most of the people who come to Bridgewater are adventurous

types; they know what they’re getting into. They understand that the chances

their job will not work out are higher than normal, but they embrace the risk

because the upside of succeeding is huge relative to the downside of having it

not work out. In the worst case they learn a lot about themselves, have an

interesting experience, and leave for other jobs; in the best case, they become

a part of an exceptional team achieving exceptional things.

New hires typically go through an acclimation period of about eighteen to

twenty-four months before becoming comfortable with the truthfulness and

transparency that is such an essential part of the Bridgewater culture—

especially accepting one’s mistakes and figuring out how to deal with them.

But some people never adapt to it. I’ve been told that joining Bridgewater is a

bit like joining an intellectual Navy SEALs; others describe it as going to a

school of self-discovery run by someone like the Dalai Lama. The people

who thrive say that while the period of adjustment is difficult, it is also

joyous because of the excellence they achieve and the extraordinary

relationships they make. And the ones who can’t or won’t adapt must be cut;

this is essential to keeping Bridgewater excellent.

For a long time, I had been the one responsible for establishing the culture

and upholding its high standards. But in 2010, I was sixty years old and had

been running Bridgewater for thirty-five years. Though I expected to be good

for another ten years or so, I was ready to put my energy into other things.

While I always wanted to be deep into the markets, I wanted to spend more

time with my family and friends, to help policymakers, and to pursue a few

growing passions (like ocean exploration and philanthropy) as well as

whatever else interested me. My plan was to step out as CEO while helping

my replacements as a mentor, remain in my investment role, and take the

time I gained from no longer managing the company to suck the marrow out

of life while I still could.

As with all organizations, whether Bridgewater would succeed would

come down to the people and the culture. People who run companies are

faced with important choices every day. How they make those choices

determines the character of the company, the quality of its relationships, and

the outcomes it produces. When the buck stopped with me, I was responsible

for most of the important decisions. Now those decisions would be in the

hands of others. While they would have a well-established culture and

agreed-upon principles that had worked for decades, the proof would be in

the pudding.

CHAPTER 6

RETURNING THE BOON:

2011–2015

It seems to me that life consists of three phases. In the first, we are dependent

on others and we learn. In the second, others depend on us and we work. And

in the third and last, when others no longer depend on us and we no longer

have to work, we are free to savor life.

I was beginning my transition from my second to my third phase. Both

intellectually and emotionally, I was no longer as excited about being

successful as I was excited about having the people I cared about be

successful without me.

I had two jobs at Bridgewater to transition out of: overseeing the

management of the company as chief executive officer, and overseeing the

management of our investments as a chief investment officer. I wasn’t going

to stop playing the markets, because that’s a game I’ve loved playing since I

was twelve and I will keep playing until I die. But I didn’t want to be needed

in either role, because of the key-man risk that would create for the company.

My partners and I understood that transitioning from the first generation of

leadership to the next in a founder-led organization with a unique culture is

difficult, especially if the leader has been in place for a long time. Bill

Gates’s transition out of the CEO role at Microsoft in 2008 was the most

recent example of that but there have been many others.

The biggest question I wrestled with was whether I should leave

management completely or stay involved as a mentor. On the one hand, I

liked the idea of stepping out completely because it would give the new

leadership the freedom to find their own ways of succeeding without me

looking over their shoulder. My friends urged me to do that—to “declare

victory,” collect my chips, and move on. But I wasn’t confident that the

transition would go well, as I hadn’t done such a thing before. I do things

through trial and error—making mistakes, figuring out what I did wrong,

coming up with new principles, and finally succeeding—and I didn’t see why

my transition should be any different. I also didn’t believe that it would be

fair for me to dump the heavy workload I was carrying on those I was passing

my CEO responsibilities to. I knew that Lee Kuan Yew, the wise founder and

leader of Singapore for forty-one years, had transitioned out of his leadership

responsibilities to be a mentor, and I had seen how well that went. For all

those reasons, I decided I would stay on as a mentor. That meant I would

either not speak at all or speak last, but always be available to provide advice.

My partners liked the idea.

We agreed we should begin as soon as possible, so those replacing me

could gain experience and we could make adjustments as needed. Since what

we didn’t know about transitioning was greater than what we did know about

it, we knew we would need to be careful. We expected that transitioning well

would take a number of years—perhaps two or three, perhaps as many as ten.

Since we had worked together for many years, we were optimistic that it

would be on the shorter end of that range.

On the first day of 2011 I announced to the company that I would be

stepping down as CEO, with Greg Jensen and David McCormick replacing

me. On July 1, I handed over my management responsibilities to Greg,

David, and the rest of the Management Committee. Simultaneously, we

explained our “up-to-ten-year transition plan” to our clients.

LEARNING WHAT SHAPERS ARE LIKE

Naturally the new management team struggled over the next eighteen months

or so. We diagnosed why in the same way an engineer would diagnose why a

machine is operating suboptimally so it could be reengineered to perform

better. Since different people produce different outcomes based on

differences in what they are like, whenever we create a team we seek to

“engineer” the right mix of attributes and people to achieve our goals. So we

looked at my attributes relative to others to see what was missing, which we

called the “Ray gap.” To be clear, we were looking at the “Ray gap” because

I was the one leaving—had Bob, David, or Greg been the ones stepping back,

we would have been studying the gaps they left.

Greg and David created a log of my various responsibilities and the

differences between the qualities they and I brought to handling them.

Everyone agreed the gap was in what we called “shaping.”

To visualize what I mean by “shaping” and “shapers,” think of Steve Jobs,

who was probably the greatest and most iconic shaper of our time, as

measured by the size and success of his shaping. A shaper is someone who

comes up with unique and valuable visions and builds them out beautifully,

typically over the doubts and opposition of others. Jobs built the world’s

largest and most successful company by revolutionizing computing, music,

communications, animation, and photography with beautifully designed

products. Elon Musk (of Tesla, SpaceX, and SolarCity), Jeff Bezos (of

Amazon), and Reed Hastings (of Netflix) are other great shapers from the

business world. In philanthropy, Muhammad Yunus (of Grameen), Geoffrey

Canada (of Harlem Children’s Zone), and Wendy Kopp (of Teach for

America) come to mind; and in government, Winston Churchill, Dr. Martin

Luther King, Jr., Lee Kuan Yew, and Deng Xiaoping. Bill Gates has been a

shaper in both business and philanthropy, as was Andrew Carnegie. Mike

Bloomberg has been a shaper in business, philanthropy, and government.

Einstein, Freud, Darwin, and Newton were giant shapers in the sciences.

Christ, Muhammad, and the Buddha were religious shapers. They all had

original visions and successfully built them out.

While these are the biggest shapers, I saw that shapers come in varying

sizes. You probably know a few personally. They might be your local

business, nonprofit, or community leaders—the people who drive change and

build lasting organizations. My objective was to identify who the future

shapers of Bridgewater would be—either by helping the people who were

replacing me in the CEO job become them or by finding shapers on the

outside and bringing them in.

On October 5, 2011, a few months after I began to think about what makes

a shaper, Steve Jobs died. I wrote about him in our Daily Observations, one

of the very few times I used the space to address noninvestment-related

content, because I admired him as a man who could visualize and execute in

breathtakingly wonderful ways. Soon after, Walter Isaacson published his

biography of Jobs. I noticed a number of similarities between us, especially

when he quoted Jobs’s own words. Soon after that, an article titled “Is Ray

Dalio the Steve Jobs of Investing?” came out in aiCIO, a prominent

investment-industry publication. It also pointed out a number of similarities

between us—that I, like Jobs, started my businesses from scratch (his from a

garage, mine from the second bedroom of my apartment), that we both came

up with innovative products that reshaped how our industries did things, and

that we had unique management styles. Bridgewater has often been called the

Apple of the investment world—but to be clear, I didn’t think that

Bridgewater or I held a candle to Apple and Jobs.

Isaacson’s book and the article pointed to other parallels in our

backgrounds, goals, and approaches to shaping—for example, we were both

rebellious, independent thinkers who worked relentlessly for innovation and

excellence; we were both meditators who wanted to “put a dent in the

universe”; and we were both notoriously tough on people. Of course, there

were important differences too. I wished Jobs had shared the principles he

had used to achieve his goals.

I wasn’t just interested in Jobs and his principles; I wanted to know about

the qualities and principles of all shapers, so I could better understand the

likenesses and differences between them and form an archetype of the typical

shaper. I had followed that approach for understanding everything; for

example, I had made an exhaustive study of recessions so that I could form a

timeless picture of an archetypal recession and then understand the

differences among them. I did that for all economic and market movements

and was inclined to do it for just about everything, because this approach

helps me understand how things work. So it made sense I’d do that to

understand shapers too.

I started by exploring the qualities of Jobs and other shapers with

Isaacson, at first in a private conversation in his office, and later at a public

forum at Bridgewater. Since Isaacson had also written biographies of Albert

Einstein and Ben Franklin—two other great shapers—I read them and probed

him about them to try to glean what characteristics they had in common.

Then I spoke with proven shapers I knew—Bill Gates, Elon Musk, Reed

Hastings, Muhammad Yunus, Geoffrey Canada, Jack Dorsey (of Twitter),

David Kelley (of IDEO), and more. They had all visualized remarkable

concepts and built organizations to actualize them, and done that repeatedly

and over long periods of time. I asked them to take an hour’s worth of

personality assessments to discover their values, abilities, and approaches.

While not perfect, these assessments have been invaluable. (In fact, I have

been adapting and refining them to help us in our recruiting and

management.) The answers these shapers provided to the standardized

questions gave me objective and statistically measurable evidence about their

similarities and differences.

It turns out they have a lot in common. They are all independent thinkers

who do not let anything or anyone stand in the way of achieving their

audacious goals. They have very strong mental maps of how things should be

done, and at the same time a willingness to test those mental maps in the

world of reality and change the ways they do things to make them work

better. They are extremely resilient, because their need to achieve what they

envision is stronger than the pain they experience as they struggle to achieve

it. Perhaps most interesting, they have a wider range of vision than most

people, either because they have that vision themselves or because they know

how to get it from others who can see what they can’t. All are able to see

both big pictures and granular details (and levels in between) and synthesize

the perspectives they gain at those different levels, whereas most people see

just one or the other. They are simultaneously creative, systematic, and

practical. They are assertive and open-minded at the same time. Above all,

they are passionate about what they are doing, intolerant of people who work

for them who aren’t excellent at what they do, and want to have a big,

beneficial impact on the world.

Take Elon Musk. When he had just come out with the Tesla and showed

me his own car for the first time, he had as much to say about the key fob that

opened the doors as he did about his overarching vision for how Tesla fits

into the broader future of transportation and how impor-tant that is to our

planet. Later on, when I asked him how he came to start his company

SpaceX, the audacity of his answer startled me.

“For a long time,” he answered, “I’ve thought that it’s inevitable that

something bad is going to happen on a planetary scale—a plague, a meteor—

that will require humanity to start over somewhere else, like Mars. One day I

went to the NASA website to see what progress they were making on their

Mars program, and I realized that they weren’t even thinking about going

there anytime soon.

“I had gotten $180 million when my partners and I sold PayPal,” he

continued, “and it occurred to me that if I spent $90 million and used it to

acquire some ICBMs from the former USSR and sent one to Mars, I could

inspire the exploration of Mars.”

When I asked him about his background in rocketry, he told me he didn’t

have one. “I just started reading books,” he said. That’s how shapers think

and act.

At times, their extreme determination to achieve their goals can make

them appear abrasive or inconsiderate, which was reflected in their test

results. Nothing is ever good enough, and they experience the gap between

what is and what could be as both a tragedy and a source of unending

motivation. No one can stand in the way of their achieving what they’re

going after. On one of the personality assessments there is a category they all

ranked low on called “Concern for Others.” But that doesn’t mean quite what

it sounds like.

Consider Muhammad Yunus, for example. A great philanthropist, he has

devoted his life to helping others. He received the Nobel Peace Prize for

pioneering the ideas of microcredit and microfinance and has won the

Congressional Gold Medal, the Presidential Medal of Freedom, the Gandhi

Peace Prize, and more. Yet he tested low on “Concern for Others.” Geoffrey

Canada, who has devoted most of his adult life to taking care of all the

disadvantaged children in a hundred-square-block area of New York’s

Harlem, also tested low on “Concern for Others.” Bill Gates, who is devoting

most of his wealth and energy to saving and improving lives, tested low as

well. Obviously Yunus, Canada, and Gates care deeply about other people,

yet the personality tests they took rated them low. Why was that? In speaking

with them and reviewing the questions that led to these ratings, it became

clear: When faced with a choice between achieving their goal or pleasing (or

not disappointing) others, they would choose achieving their goal every time.

Through this investigative process, I learned that there are distinctly

different types of shapers. The most important difference lies in whether their

shaping comes in the form of inventing, managing, or both. For example,

while Einstein shaped by inventing, he didn’t have to manage, and while Jack

Welch (who ran GE) and Lou Gerstner (who ran IBM) were great

managers/leaders of people, they didn’t have to be as inventive. The rarest

cases were people like Jobs, Musk, Gates, and Bezos, who were inventive

visionaries and managed big organizations to build those visions out.

There are a lot of people who look like shapers, in that they came up with

a great idea and got it to the point where they could sell it for a lot of money,

but did not shape consistently. Silicon Valley has many of these types;

perhaps they should be called “inventors.” I also saw that there were

wonderful leaders of organizations who weren’t classic shapers, in that they

didn’t come up with the original visions and build them out; rather, they

entered existing organizations and led them well. Only true shapers

consistently move from one success to another and sustain success over

decades, and those are the people I want to bring to Bridgewater.

My examination of shapers and my reflections on my own qualities made

clear to me that nobody sees the full range of what they need to see in order

to be exceptionally successful, though some see a wider range than others.

Those that do best both see a wide range themselves while triangulating well

with other brilliant people who see things in different, complementary ways.

This realization has been important in making my transition out of

management go well. While in the past I would encounter problems, figure

out their causes, and design my own ways to get around them, others who

think differently than I do will make different diagnoses and designs. My job

as mentor was to help them be successful at that.

This exercise reminded me that there are far fewer types of people in the

world than there are people and far fewer different types of situations than

there are situations, so matching the right types of people to the right types of

situations is key.

Because Gates and Jobs had recently left Microsoft and Apple, I watched

their former organizations closely to help me better understand how I could

help prepare Bridgewater to thrive without me. Certainly the most notable

difference between them and Bridgewater was in our cultures—how we use

the idea meritocracy of radical truth and radical transparency to bring

problems and weaknesses to the surface to prompt forthright dealing with

them.

SYSTEMIZING OUR IDEA MERITOCRACY

The more I did the research on people, the clearer it became that there are

different types of people and that, by and large, the same types of people in

the same types of circumstances are going to produce the same types of

results. Said differently, by knowing what someone is like we can have a

pretty good idea of what we can expect from them. So I was more motivated

than ever to continue gathering lots of data on what people are like to build

pointillist pictures of them to help us match people to responsibilities well.

Doing this in an evidence-based way would enhance the idea-meritocratic

process of aligning people’s responsibilities with their merits.

While this all seemed so clear and commonsensical to me, it was much

harder to achieve in practice. About a year into my transition, I saw that many

new managers (and some older ones) still couldn’t see the patterns of

people’s behaviors through time (in other words, they couldn’t connect the

dots between what people are like and the outcomes they produce). Their

reluctance to probe hard to get at what people are like was making things

more difficult.

But then I had a breakthrough, which grew out of an observation that the

challenges we were having with making management decisions didn’t exist

in our investment decision making. I realized that, by using big data analytics

and other algorithms, our computers could connect those dots more

efficiently than any of us could, just as they had helped us make connections

in the markets. These systems also didn’t have personal biases and emotional

barriers to overcome, so those being analyzed couldn’t be offended by the

data-driven conclusions the computers were coming up with. In fact, they

could look at the data and algorithms, assess them for themselves, and

suggest changes if they wanted. We were like scientists trying to develop

tests and algorithms for analyzing ourselves objectively.

On November 10, 2012, I shared my thoughts with the Management

Committee in an email. Its subject line was “The Path Out: Systemizing

Good Management”:

It is now clear to me that the main difference behind why the investment

management part of Bridgewater is likely to continue to do well and most

of the other parts of Bridgewater are unlikely to do as well (if we don’t

change how we are operating) is that the decision-making processes for

investment management have been so systemized that it’s hard for people

to screw them up (because they are largely following the systems’

instructions) while the other areas of Bridgewater are much more

dependent on the quality of the people and their decision making.

Think about that. Imagine how Bridgewater’s investment decision

making would work if it operated the same as Bridgewater’s management

decision making (i.e., dependent on the people we hired and how they

collectively made decisions in their own ways). It would be a mess.

The way the investment decision-making process works is that a small

group of investment managers who created these systems see the systems’

conclusions and the reasoning of the systems while we make our own

conclusions and explore our reasoning on our own. . . . The machine does

most of the work and we interact with it in a quality way. . . . [And] we

are not dependent on much more faulty people.

Think about how different management is. While we have principles,

we don’t have decision-making systems.

In other words, I believe that the investment decision-making process

is effective because the investment principles have been put into decision

rules that make decisions that people then follow while the management

decision-making process is less effective because the management

principles have not been put into decision rules that people can follow to

make management decisions.

It doesn’t have to be that way. Having built the investment systems

(with the help of others) and knowing about both investment decision

making and management decision making, I am confident that it can be

the same. The only questions are whether it can happen fast enough and

what will happen in the meantime.

I am working with Greg (and others) to develop these management

systems in the same way I worked with Greg and others (Bob, etc.) on the

investment systems. You are seeing this happen via the development of the

Baseball Cards, Dot Collector, Pain Button, testing, job specing, etc.

Because I have a limited time to do this, we need to move fast. At the

same time we will have to fight the battles in the trenches, with hand-to-

hand combat, to clean out those who are incapable and bring in or

promote those who are excellent.

One of the great things about algorithmic decision making is that it

focuses people on cause-effect relationships and, in that way, helps foster a

real idea meritocracy. When everyone can see the criteria the algorithms use

and have a hand in developing them, they can all agree that the system is fair

and trust the computer to look at the evidence, make the right assessments

about people, and assign them the right authorities. The algorithms are

essentially principles in action on a continuous basis.

While our management system has a long way to go before it is as well

automated as our investment system, the tools it has made possible,

especially the “Dot Collector” (an app that gathers information about people

in real time described in detail in the Work Principles), have already made an

incredible difference in the way we work.

All these tools reinforce good habits and good thinking. The good habits

come from thinking repeatedly in a principled way, like learning to speak a

language. The good thinking comes from exploring the reasoning behind the

principles.

The ultimate goal of all this was to help the people I cared about be more

successful without me, which was becoming increasingly pressing as life’s

milestones continued to remind me of my stage in life. For example, I

became a grandfather with the birth of Christopher Dalio on May 31, 2013.

And in the summer of 2013, I had a serious health scare that turned out to be

nothing but reminded me of my mortality. At the same time, I still loved

playing the markets, which I plan to do until I die, making me even more

eager to speed the transition from the second to the third phase of my life.

ANTICIPATING THE EUROPEAN DEBT CRISIS

Beginning in 2010, my Bridgewater colleagues and I began to see the

emergence of a debt crisis in Europe. We had looked at how much debt had

to be sold and how much could be bought for a number of countries and

determined that many Southern European nations were likely to come up

short. The resulting crisis could be as bad as or worse than the one in 2008–

09.

As in 1980 and 2008, while our calculations clearly pointed to a debt crisis

ahead, I knew that I could be wrong. Because it would be a big deal if I was

right, I wanted to discuss what I was seeing with top policymakers both to

alert them and to have them correct me if they saw things differently. I

encountered the same sort of resistance without good explanations that I had

encountered in Washington in 2008, only this time in Europe. Things were

stable at the time, and though I knew there was no reason to believe they

would stay that way, most of the people I spoke to weren’t ready to listen to

my reasoning. I remember a meeting I had with the head of the International

Monetary Fund when we were still in the calm before the storm. He doubted

my seemingly crazy conclusions, and he wasn’t interested in going through

the numbers.

Just as U.S. policymakers had before 2008, the Europeans did not fear

what they hadn’t experienced before. Because things were good at the time

and the picture I was painting was worse than anything they’d experienced in

their lifetimes, they found what I was saying implausible. They also didn’t

possess a granular understanding of who the borrowers and lenders were and

how their abilities to borrow and lend would change with changing market

conditions. Their understandings of how markets and economies work were

oversimplified, like those of academics. For example, they looked at

investors as a single thing they called “the market,” rather than an amalgam

of different players who bought and sold for different reasons. When the

markets did badly, they wanted to do things that increased confidence,

figuring that if they built confidence the money would come and the

problems would disappear. They didn’t see that whether they were confident

or not, specific buyers didn’t have enough money and credit to buy all the

debt that had to be sold.

Just as all human bodies work in essentially the same way, so do the

economic machines in different countries. And just as physical diseases infect

people without regard to nationality, so do economic diseases. So, while the

policymakers were at first skeptical, I approached my conversations with

them by looking at the physiology of the case at hand. I would diagnose the

economic disease they were suffering from, and show them how its

symptoms progress by referencing prior analogous cases. Then I’d explain

the best practices for treating the disease at its different stages. We would

have high-quality back-and-forths about the linkages and the evidence.

Yet even when I did succeed in helping them see the linkages, the political

decision-making systems they had to work within were dysfunctional. Not

only did they have to decide what they would do as individual countries, the

nineteen countries of the European Union had to agree with each other before

they could act—in many cases unanimously. There was often no clear way of

resolving disagreements, which was a big problem because what needed to be

done (printing money) was objectionable to German economic conservatives.

As a result, crises would intensify to breaking points while Europe’s leaders

grappled in long closed-door meetings. Those power struggles tested the

nerves of everyone involved. I can’t possibly convey the amount of bad

behavior these policymakers had to endure for the benefit of the people they

represented.

For example, in January 2011, a few weeks after he’d been appointed

minister of economy and competitiveness by Spain’s new president, I met

Luis de Guindos, a man I learned to admire for his forthrightness,

intelligence, and heroic willingness to sacrifice himself for his country’s

well-being. The old government in Spain had been thrown out and the new

government took office as Spanish banks were about to collapse. The new

Spanish policymakers were immediately forced to haggle with

representatives from the IMF, the European Union, and the European Central

Bank (the “Troika” as it was called). They did this into the wee hours of the

morning and at the end were required to sign a loan agreement that

essentially handed over control of their banking system to the Troika in

exchange for the financial support they desperately needed.

My meeting with Minister de Guindos took place the morning after the

first and most difficult of these negotiations. With bloodshot eyes but a very

alert mind, he patiently and forthrightly answered all my difficult questions

and shared his thoughts about what reforms Spain should undertake to deal

with their problems. During the next couple of years, over considerable

objections, he and his government pushed these controversial reforms

through. He never got the praise he deserved, but he didn’t care because his

satisfaction came from seeing the results he produced. To me, that is a hero.

As time passed, the European debtor countries fell into deeper

depressions. This led Mario Draghi, the president of the European Central

Bank, to make the bold decision to buy bonds in September 2012. This move

averted the imminent debt crisis, saved the euro, and, as it would turn out,

made a lot of money for the ECB. But it failed to immediately stimulate

credit and economic growth in the countries that were in depression.

Inflation, which the ECB was mandated to get to about 2 percent, was below

that target and falling. While the ECB had offered loans on attractive terms to

banks in an attempt to solve this issue, banks weren’t taking them up on the

offer sufficiently to make a difference. I believed that things would continue

to worsen unless the ECB “printed money” and pushed it into the system by

buying more bonds. The move toward quantitative easing appeared obvious

and necessary to me, so I visited Draghi and the ECB’s executive board to

share my concerns.

At the meeting, I told them why this approach would not be inflationary

(because it is the level of spending, which is money plus credit, and not just

the amount of money, that drives spending and inflation). I focused on how

the economic machine works because I felt that if we could agree on that—

most importantly, how buying bonds moves money through the system—we

could agree on its impacts on inflation and economic growth. In that meeting,

and in all such meetings, I shared our calculations as well as the important

cause-effect relationships as I saw them, so that together we could assess

whether the conclusions made sense.

A major impediment to this action was that there is no single bond market

for the entire Eurozone, and the ECB, like most central banks, isn’t supposed

to favor one area/country over another. Given those conditions, I shared my

theory for how the ECB could do quantitative easing without breaking its

rules by buying bonds proportionately across every member country, even

though Germany didn’t need or want the easing that such purchases would

bring them. (The German economy was doing relatively well and inflation

fears were beginning to emerge there.)

In the course of those eighteen months, I met with several top European

economic policymakers, perhaps most importantly German finance minister

Wolfgang Schäuble, whom I judged to be exceptionally thoughtful and

selfless. I also saw how politics within Germany and Europe worked.

When

push came to shove, the ECB would have to do what was best for Europe,

which was to print the money and buy the bonds in the way I had suggested.

Doing that was consistent with the ECB’s mandate, and the Southern

European debtor countries had the votes to allow it to do that, so I figured

that it would be the Germans who would get overruled and face the decision

to leave the Eurozone, which they would ultimately not do because their

leaders had a strong commitment to the Eurozone with Germany as part of it.

Draghi finally announced the move in January 2015. It had a great effect

and created a precedent that would allow more quantitative easings in the

future if they were needed. The market reaction was very positive. On the day

of Draghi’s announcement European equities were up a percent and a half,

government bond yields fell across the major European economies, and the

euro fell 2 percent against the dollar (which helped stimulate the economy).

These moves continued over the following months, stimulating European

economies, supporting a pickup in growth, and reversing the decline in

inflation.

The ECB’s decision was obviously the right thing to do, for reasons that

were relatively simple. But seeing how controversial its move was, it

occurred to me that the world needed a simple explanation of how the

economic machine works, because if everyone understood the basics, then

economic policymakers would be able to do the right things a lot faster and

with less angst in the future. That led me to make a thirty-minute video, How

the Economic Machine Works, which I released in 2013. Besides explaining

how the economy works it provides a template that helps people assess their

economies and gives them guidance about what to do and what to expect

during a crisis. It had a much bigger impact than I expected, as it was

watched by more than five million people in eight languages. A number of

policymakers told me in private that they found it helpful for their own

understanding, for dealing with their constituents, and for finding better paths

forward. This was very rewarding to me.

From my contacts with policymakers in a number of countries I learned

quite a bit about how international relations really works. It is quite different

from what most people imagine. Countries behave in a more self-interested

and less considerate way than what most of us would consider appropriate for

individuals. When countries negotiate with one another, they typically

operate as if they are opponents in a chess match or merchants in a bazaar in

which maximizing one’s own benefit is the sole objective. Smart leaders

know their own countries’ vulnerabilities, take advantage of others’

vulnerabilities, and expect the other countries’ leaders to do the same.

Most people who haven’t had direct contact with the leadership of their

own and other countries form their views based on what they learn in the

media, and become quite naive and inappropriately opinionated as a result.

That’s because dramatic stories and gossip draw more readers and viewers

than does clinical objectivity. Also, in some cases “journalists” have their

own ideological biases that they are trying to advance. As a result, most

people who see the world through the lens of the media tend to look for who

is good and who is evil rather than what the vested interests and relative

powers are and how they are being played out. For example, people tend to

embrace stories about how their own country is moral and the rival country is

not, when most of the time these countries have different interests that they

are trying to maximize. The best behaviors one can hope for come from

leaders who can weigh the benefits of cooperation, and who have long

enough time frames that they can see how the gifts they give this year may

bring them benefits in the future.

These conflicts of vested interests don’t just play out internationally; it can

also be nasty within countries. Finding out what’s true and trying to do

what’s in everyone’s best interests is rare, though most policymakers pretend

that’s what they’re doing. More typically, they act in support of their

constituents’ interests. For example, representatives of those with greater

income will say higher taxes stifle growth while representatives of those with

less income will say the opposite. It’s hard to get everyone to even try to look

at the whole picture objectively, let alone to operate in the interests of the

whole.

Nonetheless, I came to respect most of the policymakers I worked with

and to feel sorry for them because of the terrible positions they were in. Most

are highly principled people who are forced to operate in unprincipled

environments. The job of a policymaker is challenging under the best of

circumstances, and it’s almost impossible during a crisis. The politics are

horrendous and distortions and outright misinformation from the media make

things worse. A number of the policymakers I met—including Draghi, de

Guindos, Schäuble, Bernanke, Geithner, Summers, and many others—were

real heroes, meaning that they put others and the mission they committed to

above themselves. Unfortunately, most policymakers enter their careers as

idealists and leave disillusioned.

One of those heroes I have been fortunate enough to learn from and, I

hope, help is China’s Wang Qishan, who has been a remarkable force for

good for decades. To explain what he is like and the journey that took him to

the top of China’s leadership would take more of this book than I can spare.

In brief, Wang is a historian, a very high-level thinker, and a very practical

man. I have rarely known a person to be both extremely wise and extremely

practical. A leading shaper of the Chinese economy for decades who is also

responsible for eliminating corruption, he is known to be a no-nonsense man

who can be trusted to get stuff done.

Every time I go to China, we meet for sixty to ninety minutes. We talk

about what’s happening in the world, and how that relates to thousands of

years of history and the never-changing nature of mankind. We discuss a

wide range of other topics as well, ranging from physics to artificial

intelligence. We are both keenly interested in how most everything happens

over and over again, the forces behind those patterns, and the principles that

work and don’t work in dealing with them.

I gave Wang a copy of Joseph Campbell’s great book The Hero with a

Thousand Faces, because he is a classic hero and I thought it might help him.

I also gave him The Lessons of History, a 104-page distillation of the major

forces through history by Will and Ariel Durant, and River Out of Eden by

the insightful Richard Dawkins, which explains how evolution works. He

gave me Georgi Plekhanov’s classic On the Role of the Individual in History.

All these books showed how the same things happened over and over again

throughout history.

Most of my conversations with Wang are at the principle level; he sees the

rhyme of history and puts the particulars we speak of in that context.

“Unattainable goals appeal to heroes,” he once told me. “Capable people are

those who sit there worrying about the future. The unwise are those who

worry about nothing. If conflicts got resolved before they became acute, there

wouldn’t be any heroes.” His advice has helped me in my planning for

Bridgewater’s future. For example, when I asked him about checks and

balances of power, he pointed to Julius Caesar’s overthrow of the Roman

Senate and Republic as an illustration of how important it is to make sure no

one person is more powerful than the system. I took his advice to heart as I

set out to improve Bridgewater’s governance model.

Every time I speak with Wang, I feel like I get closer to cracking the

unifying code that unlocks the laws of the universe. He uses his timeless

perspective to see the present and the likely future more clearly.

Being around such people, especially if I can help them, is thrilling to me.

RETURNING THE BOON

Joseph Campbell’s The Hero with a Thousand Faces, one of the books I gave

to Wang as well as a number of other heroes I know, was introduced to me by

my son Paul in 2014. While I had seen Campbell on television nearly thirty

years earlier and remembered being impressed by him, I hadn’t read his

book. In it, Campbell looks at large numbers of “heroes” from different

cultures—some real and some mythical—and describes their archetypal

journeys through life. Campbell’s description of how heroes become heroes

aligned with my thinking about shapers. And it gave me powerful insights

about the heroes I know and the patterns of my own life.

For Campbell, a “hero” isn’t a perfect person who always gets things right.

Far from it. A hero is someone who “found or achieved or [did] something

beyond the normal range of achievement,” and who “has given his life to

something bigger than himself or other than himself.” I had met a number of

such people throughout my life. What was most interesting about Campbell’s

work was his description of how they got that way. Heroes don’t begin as

heroes; they just become them because of the way one thing leads to another.

The diagram on the following page shows the archetypal hero’s journey.

They typically start out leading ordinary lives in an ordinary world and are

drawn by a “call to adventure.” This leads them down a “road of trials” filled

with battles, temptations, successes, and failures. Along the way, they are

helped by others, often by those who are further along the journey and serve

as mentors, though those who are less far along also help in various ways.

They also gain allies and enemies and learn how to fight, often against

convention. Along the way, they encounter temptations and have clashes and

reconciliations with their fathers and their sons. They overcome their fear of

fighting because of their great determination to achieve what they want, and

they gain their “special powers” (i.e., skills) from both “battles” that test and

teach them, and from gifts (such as advice) that they receive from others.

Over time, they both succeed and fail, but they increasingly succeed more

than they fail as they grow stronger and keep striving for more, which leads

to ever-bigger and more challenging battles.

Heroes inevitably experience at least one very big failure (which Campbell

calls an “abyss” or the “belly of the whale” experience) that tests whether

they have the resilience to come back and fight smarter and with more

determination. If they do, they undergo a change (have a “metamorphosis”)

in which they experience the fear that protects them, without losing the

aggressiveness that propels them forward. With triumphs come rewards.

Though they don’t realize it when they are in their battles, the hero’s biggest

reward is what Campbell calls the “boon,” which is the special knowledge

about how to succeed that the hero has earned through his journey.

Joseph Campbell’s Hero’s Journey schema from The Hero with a Thousand Faces (New

permission.

Late in life, winning more battles and acquiring more rewards typically

becomes less exciting to heroes than passing along that knowledge to others

—“returning the boon” as Campbell called it. Once the boon is returned, the

hero is free to live and then free to die, or, as I see it, to transition from the

second phase in life to the third phase (in which one is free to savor life until

one passes away).

Reading Campbell, I saw that heroes, like shapers, come in varying sizes

—there are big ones and small ones—that they are real people, and that we

all know some. I also saw that being a hero is typically not all it’s cracked up

to be—they get beat up a lot, and many are attacked, humiliated, or killed

even after they triumph. In fact, it’s hard to see the logic for choosing this

hero role, if one were to choose. But I could see and relate to how a certain

type of person would start and stay on that path.

While Campbell’s description of the hero’s journey captured the essence

of my own journey through life and the journeys of many of the people I call

shapers, “hero” is not a word that I would use to describe myself and I

certainly would not put my own accomplishments on the level of the heroes

Campbell wrote about.

But learning about the hero’s journey did help me

crystallize my understanding of where I was in my own journey, and what I

should do next. The section on returning the boon spoke to me in a personal

way, as though Campbell knew exactly what I was wrestling with. With the

reflections it prompted, I could see that my life would be over in a relatively

short time and that what I’d leave behind could be more important, last

longer, and affect many more people than just those at Bridgewater and my

family. That helped make clear that I needed to pass along the things I had

that could help others beyond me, most importantly the principles in this

book, but also my money.

As the saying goes, “You can’t take it with you.” My need to start thinking

about who should get what wasn’t just because of my age and the time it

would take to do it well; it was also instinctive. Over time, the circle of

people and things I cared about had broadened from just me when I was

young, to me and my family when I became a parent, to my community when

I was a bit more mature, to people beyond my community and the whole

environment now.

WRESTLING WITH THE QUESTIONS OF

PHILANTHROPY

My first exposure to “philanthropy”

occurred back in the late 1990s when I

was approaching fifty. At that time, Matt was sixteen, spoke Mandarin, and

visited a Chinese orphanage to help someone, where he learned that a $500

surgery could save or radically improve some lives. We and our friends gave

him money to help. Then, my friend Paul Tudor Jones taught Matt how to

create a 501(c)(3) foundation and Matt, just a junior in high school, created

the China Care Foundation in 2000. Matt brought our family to the

orphanages, so we had close contact with these special-needs children and

fell in love with them. We also watched Matt struggle to decide which

children would live and which would die because there wasn’t enough money

to save them all. Imagine being faced with the choice between a big night out

on the town or saving a child’s life. That was essentially the choice we

constantly faced. This experience led us to become more involved with

philanthropy, so in 2003 we set up our own foundation to provide support in

more organized ways. We wanted to do our philanthropy together, as a

family activity, which has proven to be fabulous.

Figuring out how to best give away money is as complex an undertaking

as figuring out how to make it. Though we now know a lot more about it than

we did when we started, we still don’t always feel capable to make the best

decisions possible, so my family and I are still feeling our way through it. I

will give you a few examples of the questions we have been wrestling with

and how our thinking about them has evolved, starting with the question of

how much money should be saved for my family relative to how much

should go to people and causes that are more distant, yet more desperately in

need.

Long before I had a lot of money, I had determined that I wanted my sons

to have only enough to afford excellent health care, excellent education, and

an initial boost to help their careers get started. My perspective was

influenced by my own journey through life, which took me from having

nothing to having a lot. That taught me to struggle well and made me strong.

I wanted the same for the people I loved. So, when I had earned a lot of

money, I felt I had plenty of money to give away to others.

Over time, as we gained experience in trying to help in a number of areas,

I learned how fast money goes and that we didn’t have nearly enough to take

care of everything we cared about. Additionally, when my first grandchild

was born, it prompted me to wonder how many generations I should budget

to protect. Speaking to others in comparable positions, I discovered that even

the richest people feel short of the money they need to do the things they

want to do. So I studied how other families approach the question of how

much to set aside for family and how much to give away at what pace. While

our family still has not answered these questions definitely, I know that I

personally will give more than half of my money to those beyond my family.

Which causes we should donate to was another big question. Barbara’s

biggest passion has been helping students in the most stressed public school

districts in Connecticut, especially those students who are called “disengaged

and disconnected.”

A study she funded showed that 22 percent of high

school students fall into one of these two categories, which was shocking

because most will probably become adults who will suffer and be burdens on

society rather than flourishing contributors to it. Because she has a lot of

direct contact with these children and their teachers, she understands their

needs. When she learned that 10,000 of them didn’t have winter coats, she

felt compelled to provide them. What she showed me opened my eyes. How

can clothing and nutrition be so severely deficient in this “land of

opportunity”? Everyone in our family believes that equal opportunity, which

is one of the most fundamental human rights, requires equal educational

opportunity—and that educational opportunities are terribly unequal. The

economic costs—in the forms of crime and incarceration—as well as the

social costs of not investing in improving these conditions are immense.

While we have felt compelled to help, we’ve discovered it is very difficult to

have a significant impact relative to the size of the problem.

I feel deeply connected to nature, especially the oceans. The oceans are

our world’s greatest asset, covering 72 percent of its surface and comprising

99 percent of its livable space. It thrills me to support scientists who are

exploring the oceans and media showing them in the incredible environments

they visit. I’m on a mission to make clear that ocean exploration is even more

important and exciting than space exploration so that our oceans get more

support and will be more sensibly managed. To add to my excitement, my

son Mark is a wildlife filmmaker who shares my passion, so we get to pursue

it together.

Matt’s passion is to bring inexpensive, effective computing to the

developing world as a way of expanding and improving education and health

care. Paul’s passion is mental health and his wife’s is fighting climate

change. Devon is more focused on his career than on philanthropy now, but

his wife cares deeply about animal welfare. Our family continues to support

special-needs children in China, as well as an institute that teaches best

practices to Chinese philanthropists. We also support the teaching of

meditation to children in stressful environments and to veterans with PTSD,

cutting-edge heart research, microfinance and other social enterprises, and

much more.

We view our donations as investments and want to make sure that we have

high philanthropic returns on our money. So another big question we wrestle

with is how to measure those returns. It’s much easier to measure efficiency

in a business by seeing how much its revenue exceeds its cost. Because of

this, we developed an attraction to sustainable social enterprises. Still, I saw

that so many philanthropic investments could pay off economically as well as

socially, and it tormented me that our society passes them up.

We also wrestled with how big our organization should be and what

governance controls we should have in order to ensure the quality of our

philanthropic decision making. I approached these decisions the same way I

explain in Work Principles—by creating formalized principles and policies

for our decision making. For example, because we are bombarded with more

requests for grants than we can intelligently look at, I mandated a policy not

to review unsolicited requests so our staff has the time to sort through the

areas we want to be focused on. We are continuously improving all our

principles and policies, and I dream about building decision-making

algorithms for our philanthropic efforts, though that’s beyond my reach at the

moment.

As you might have guessed, we also seek advice from the most

experienced and respected people possible. Bill Gates and the people we met

through our participation in his, Melinda Gates’s, and Warren Buffett’s

Giving Pledge have been enlightening. Others such as Muhammad Yunus,

Paul Jones, Jeff Skoll, the Omidyar folks, and the people at TED have been

very helpful. The most important thing we’ve learned is that there’s no one

right way to do philanthropy, though there are plenty of wrong ways.

Giving away the money that I acquired during my lifetime—and doing

that well—has been a joy, a challenge, and the appropriate thing to do at this

stage in my life.

BRIDGEWATER TURNS FORTY

In June 2015, Bridgewater marked its fortieth anniversary, an amazing

milestone we celebrated by throwing a big party. We had a lot to celebrate,

since by most measures no firm in our industry had been as successful.

Key

people who had been a part of our journey from its outset and throughout our

forty years got up to speak. Each of them described the evolution of the

company through their eyes—how some things had changed over the years

while others had stayed the same, most importantly, our culture of striving

for excellence in work and excellence in relationships by being radically

truthful and radically transparent with each other. They recounted how we

uniquely and repeatedly tried new things, failed, learned from our failures,

improved, and tried again, doing that over and over in an upward spiral.

When it was my turn to speak, I wanted to convey what I had always tried to

give the people at Bridgewater, and what I wanted them to have in the future

without me:

A community in which you always have the right and obligation to make

sense of things and a process for working yourselves through

disagreements—i.e., a real, functioning idea meritocracy. I want you to

think, not follow—while recognizing that you can be wrong and that you

have weaknesses—and I want to help you get the most likely best

answers, even if you personally don’t believe that they’re the best

answers. I want to give you radical open-mindedness and an idea

meritocracy that will take you from being trapped in your own heads to

having access to the best minds in the world to help you make the best

decisions for you and for our community. I want to help you all struggle

well and evolve to get the most out of life.

Though there were still important things that had to be done, at the time I

thought that we were wrapping up my transition nicely. I had no idea how

difficult the next year would be.

9 In Germany politics are like everywhere else in that there are opposing forces that

struggle with each other and decisions are made via a mix of power and negotiation. This

makes it desirable to know who has what power and is willing to negotiate what. What

makes Germany different is the amount of attention it pays to legal technicalities.

10 I want to be clear that I don’t believe that those who are “heroes” or “shapers” are either

better people or are on better paths. It’s perfectly sensible to not have any desire to go on

such a journey. I believe that what’s most important is to know one’s own nature and

operate consistently with it.

11 The word “philanthropy” doesn’t sit well with me in describing what we are doing.

What we are doing is helping out with what we care about because of the joy it gives us—

like the joy one gets from helping a friend. To my ear, “philanthropy” has taken on a

meaning that sounds more official. For example, some people have come to judge whether

something is philanthropic by whether it is consistent with what tax law determines is

philanthropic. When we approach our philanthropy, we just see people and things that we

are excited about helping.

12 A disengaged student is one who attends school but doesn’t engage in doing the work.

A disconnected student is one who doesn’t attend school and the system has lost track of.

13 That January, we’d launched our first new product in more than a decade, a fund we

called “Optimal Porfolio,” which combined alphas and betas in ways uniquely suited for a

global macro environment in which interest rates were near zero. The launch was a big

success, the largest in the history of the hedge fund industry.

CHAPTER 7

MY LAST YEAR AND MY GREATEST

CHALLENGE:

2016–2017

While even before that fortieth anniversary we had all been aware that our

transition wasn’t going as smoothly as we’d hoped, in the months that

followed our problems came to a head in ways that caught us off guard.

While the investment part of Bridgewater was better than ever, other parts of

the business, like the technology and recruiting areas, were slipping.

I was no longer CEO, so it was not my job to manage the company. As

chairman, my job was to oversee the CEOs, to make sure that they were

managing it well. And Greg Jensen and Eileen Murray, the CEOs at the time,

were clearly overstretched. We all agreed that the company wasn’t being

managed adequately, but we disagreed on what to do about it. Disagreements

like these were expected, as we always want everyone to think independently

and argue for what they view as best. That is why we have principles and

processes for resolving them.

So, over a period of several weeks, we exchanged our views. Then key

parties presented their perspectives and recommendations to members of our

Management Committee and our Stakeholders Committee (which is

essentially the Bridgewater board), who considered the alternative paths and

ultimately voted on them. The most important decision that came out of that

process was announced in March 2016: Greg would step out of his co-CEO

role so that he could focus all his attention on his co-chief investment officer

role (which he handled with Bob Prince and me), and I would temporarily

join Eileen as co-CEO while we implemented the structural changes needed

to allow Bridgewater to work well without me.

While that wasn’t the outcome any of us had hoped for when I first

stepped out as CEO and passed it on to others, it wasn’t entirely unexpected.

Our struggles had been apparent for some time, and we’d tried different

iterations. We knew that leadership transitions are never easy, and our modus

operandi has always been to try, fail, diagnose, redesign, and try again. That’s

what we were doing. Now was the time for a leadership change.

Still, this particular failure was painful, especially for Greg and me. I

realized that I had handed Greg too heavy a load in expecting him to carry

out both the co-CEO and co-CIO roles. I regret that mistake more than any

other I made in running Bridgewater because it hurt both of us and the

company. I had not only mentored Greg, but he had been like a son to me for

nearly twenty years. He and I both wanted and expected him to run the

company. The pain of this failure was made worse, especially for Greg, by

the sensational and inaccurate accounts that appeared in the media. Story

after story portrayed it as a bitter death-match between two titans rather than

what it really was, which was people who loved Bridgewater working

through their disagreements in an idea-meritocratic way. This was Greg’s

going-into-the-abyss experience on his own hero’s journey—and it was also

that for me, and for a number of other leaders of the company—and not just

because it was so painful, but because it led us to a metamorphosis that

improved us a lot.

Greg is twenty-five years younger than me. I often think about where I

was at his age, and how much I’ve learned in the years since. I know Greg

will go on to succeed remarkably in his own way. I was pleased that we both

came through this stronger, and especially pleased that our systems for

identifying and resolving problems had worked as well as they had. While we

all had different perspectives, this case reaffirmed our belief that our

collective idea-meritocratic decision-making process would produce better

results than any one of us could have done alone. It was having such a

process, along with our deep relationships, that kept us together.

I realized again that what I didn’t know was much greater than what I did,

in this case not knowing how to transition out of the founder-leader role. So I

reached out to some of the greatest experts I could speak with for advice.

Perhaps the best advice we received came from management expert Jim

Collins, who told us that “to transition well, there are only two things that

you need to do: Put capable CEOs in place and have a capable governance

system to replace the CEOs if they’re not capable.” That was what I had

failed to do and what I now had a second shot at doing right. So I began to

think about governance in a way that I never had before.

Simply put, governance is the system of checks and balances ensuring that

an organization will be stronger than whoever happens to be leading it at any

one time. Because I was a founder-entrepreneur, I had run Bridgewater for

thirty-five years with no formal rules to check and balance me (though I had

created an informal governance system by having me report to our

Management Committee as a check on my decision making).

While that informal system had worked for me, it could not work well

without me. Clearly, we needed to build a new governance system that would

allow Bridgewater to retain its unique way of being and its uncompromising

standards no matter who was in charge—and build it to be resilient enough to

change the company’s management if that was required. I went on to do that

with the help of others, and we are doing that still.

I had learned that it’s wrong to assume either that a person in one role will

be successful in another role or that the ways one person operates will work

well for another. This difficult year also taught me a lot about the people

around me, especially David McCormick and Eileen Murray, who showed

their commitments to our shared mission, as numerous other people did.

There were some failures that we would have rather not had, but that was to

be expected, given our unique culture of trial and error and learning from

mistakes. Thanks to the changes we put into place, I was able to step out of

my temporary stint as CEO after one year, in April 2017.

As I write these words in 2017, I view this year as the final one in my

transition from the second phase of my life to the third, when I will have

finished passing along the knowledge I have gathered along the way, and, as

Joseph Campbell described it, I will be free to live and free to die. But right

now I’m not thinking about the dying part; I’m thinking about how to live

freely, and I’m excited about it.

CHAPTER 8

LOOKING BACK FROM A HIGHER

LEVEL

As I look back on my experiences, it’s interesting to reflect on how my

perspectives have changed.

When I started out, each and every twist and turn I encountered, whether

in the markets or in my life in general, looked really big and dramatic up

close, like unique life-or-death experiences that were coming at me fast.

With time and experience, I came to see each encounter as “another one of

those” that I could approach more calmly and analytically, like a biologist

might approach an encounter with a threatening creature in the jungle: first

identifying its species and then, drawing on his prior knowledge about its

expected behaviors, reacting appropriately. When I was faced with types of

situations I had encountered before, I drew on the principles I had learned for

dealing with them. But when I ran into ones I hadn’t seen before, I would be

painfully surprised. Studying all those painful first-time encounters, I learned

that even if they hadn’t happened to me, most of them had happened to other

people in other times and places, which gave me a healthy respect for history,

a hunger to have a universal understanding of how reality works, and the

desire to build timeless and universal principles for dealing with it.

Watching the same things happen again and again, I began to see reality as

a gorgeous perpetual motion machine, in which causes become effects that

become causes of new effects, and so on. I realized that reality was, if not

perfect, at least what we are given to deal with, so that any problems or

frustrations I had with it were more productively directed to dealing with

them effectively than complaining about them. I came to understand that my

encounters were tests of my character and creativity. Over time, I came to

appreciate what a tiny and short-lived part of that remarkable system I am,

and how it’s both good for me and good for the system for me to know how

to interact with it well.

In gaining this perspective, I began to experience painful moments in a

radically different way. Instead of feeling frustrated or overwhelmed, I saw

pain as nature’s reminder that there is something important for me to learn.

Encountering pains and figuring out the lessons they were trying to give me

became sort of a game to me. The more I played it, the better I got at it, the

less painful those situations became, and the more rewarding the process of

reflecting, developing principles, and then getting rewards for using those

principles became. I learned to love my struggles, which I suppose is a

healthy perspective to have, like learning to love exercising (which I haven’t

managed to do yet).

In my early years, I looked up to extraordinarily successful people,

thinking that they were successful because they were extraordinary. After I

got to know such people personally, I realized that all of them—like me, like

everyone—make mistakes, struggle with their weaknesses, and don’t feel that

they are particularly special or great. They are no happier than the rest of us,

and they struggle just as much or more than average folks. Even after they

surpass their wildest dreams, they still experience more struggle than glory.

This has certainly been true for me. While I surpassed my wildest dreams

decades ago, I am still struggling today. In time, I realized that the

satisfaction of success doesn’t come from achieving your goals, but from

struggling well. To understand what I mean, imagine your greatest goal,

whatever it is—making a ton of money, winning an Academy Award,

running a great organization, being great at a sport. Now imagine

instantaneously achieving it. You’d be happy at first, but not for long. You

would soon find yourself needing something else to struggle for. Just look at

people who attain their dreams early—the child star, the lottery winner, the

professional athlete who peaks early. They typically don’t end up happy

unless they get excited about something else bigger and better to struggle for.

Since life brings both ups and downs, struggling well doesn’t just make your

ups better; it makes your downs less bad. I’m still struggling and I will until I

die, because even if I try to avoid the struggles, they will find me.

Thanks to all that struggling and learning, I have done everything I wanted

to do, gone everywhere I wanted to go, met whomever I wanted to meet,

gotten everything I wanted to own, had a career that has been enthralling,

and, most rewardingly, had many wonderful relationships. I have experienced

the full range, from having nothing to having an enormous amount, and from

being a nobody to being a somebody, so I know the differences. While I

experienced them going from the bottom up rather than from the top down

(which was preferable and probably influenced my perspective), my

assessment is that the incremental benefits of having a lot and being on top

are not nearly as great as most people think. Having the basics—a good bed

to sleep in, good relationships, good food, and good sex—is most important,

and those things don’t get much better when you have a lot of money or

much worse when you have less. And the people one meets at the top aren’t

necessarily more special than those one meets at the bottom or in between.

The marginal benefits of having more fall off pretty quickly. In fact,

having a lot more is worse than having a moderate amount more because it

comes with heavy burdens. Being on top gives you a wider range of options,

but it also requires more of you. Being well-known is probably worse than

being anonymous, all things considered. And while the beneficial impact one

can have on others is great, when you put it in perspective, it is still

infinitesimally small. For all those reasons, I cannot say that having an

intense life filled with accomplishments is better than having a relaxed life

filled with savoring, though I can say that being strong is better than being

weak, and that struggling gives one strength. My nature being what it is, I

would not have changed my life, but I can’t tell you what is best for you.

That is for you to choose. What I have seen is that the happiest people

discover their own nature and match their life to it.

Now that my desire to succeed has given way to a desire to help others

succeed, that’s become my current struggle. It’s now clear to me that my

purpose, your purpose, and the purpose of everything else is to evolve and to

contribute to evolution in some small way. I didn’t think about that at the

start; I just went after the things I wanted. But along the way I evolved, and

now I am sharing these principles with you to help you evolve too. I realized

that passing on knowledge is like passing on DNA—it is more important than

the individual, because it lives way beyond the individual’s life. This is my

attempt to help you succeed by passing along to you what I learned about

how to struggle well—or, at the very least, to help you get the most out of

each unit of effort you put in.

PRINCIPLES

Good principles are effective ways

of dealing with reality. To learn

my own, I spend a lot of time

reflecting. So rather than just

giving you my principles, I will

share the reflections behind them.

I believe that everything that happens comes about because of cause-effect

relationships that repeat and evolve over time. At the big bang, all the laws

and forces of the universe were created and propelled forward, interacting

with each other over time like a complex series of machines that work

together: the structure of galaxies, the makeup of Earth’s geography and

ecosystems, our economies and markets, and each one of us. Individually, we

are machines made up of different machines—our circulatory systems, our

nervous systems, and so on—that produce our thoughts, our dreams, our

emotions, and every other aspect of our distinct personalities. All these

machines are evolving together to produce the reality we encounter every

day.

• Look to the patterns of those things that affect you in

order to understand the cause-effect relationships

that drive them and to learn principles for dealing

with them effectively.

By doing this, you will begin to understand how the machinery underlying

any “another one of those” works and develop a mental map for dealing with

it. As your understanding of these relationships grows, the essentials stand

out from the blizzard of things coming at you; you will notice which “one of

those” you are facing and instinctually apply the right principles to help you

through it. Reality, in turn, will send you loud signals about how well your

principles are working by rewarding or punishing you, so you will learn to

fine-tune them accordingly.

Having good principles for dealing with the realities we encounter is the

most important driver of how well we handle them. I’m not saying that all

people have the same encounters. It is certainly the case that different people

in different parts of the world face different challenges. Still, most of our

encounters with reality fall under one category or another and the number of

those categories is not enormous. If you were to write down what type of

encounter you have every time you have one (e.g., the birth of a child, the

loss of a job, a personal disagreement) and compile them in a list, it would

probably total just a few hundred items and only a few of them would be

unique to you. You might want to try this. Not only will you see for yourself

if what I’m saying is true, but you will also start to build a list of the things

you need to think about and have principles for.

Whatever success I’ve had is because of the principles I followed and not

because of anything unique about me, so anyone following these principles

can expect to produce broadly similar results. That said, I don’t want you to

follow my (or anyone’s) principles blindly. I suggest that you think through

all the principles available to you from different sources and put together a

collection of your own that you can turn to whenever reality sends “another

one of those” your way.

Life Principles and Work Principles are organized in outline form at three

different levels so you can skim along the surface or dive in depending on the

amount of time and interest you have.

1 Higher-level principles, which are also the chapter

titles, are preceded by single numbers.

1.1 Mid-level principles are contained within each

chapter and are designated by two numbers: one

indicating the higher-level principle it is under and the

other showing the order in which it appears in the

chapter.

a. Sub-principles fall under the mid-level principles and are marked with letters.

All three levels of principles have explanations following them. To give

you a quick overview, I’ve included summaries of principles at the end of

Life Principles and the beginning of Work Principles. I suggest you start with

the higher-level principles and the text explaining them, plus the headings for

both the principles and subprinciples. Life Principles is intended to be read in

its entirety, while Work Principles is meant as more of a reference book.

PART II

LIFE PRINCIPLES

1 Embrace Reality and Deal

with It

There is nothing more important than understanding how reality works and

how to deal with it. The state of mind you bring to this process makes all the

difference. I have found it helpful to think of my life as if it were a game in

which each problem I face is a puzzle I need to solve. By solving the puzzle,

I get a gem in the form of a principle that helps me avoid the same sort of

problem in the future. Collecting these gems continually improves my

decision making, so I am able to ascend to higher and higher levels of play in

which the game gets harder and the stakes become ever greater.

All sorts of emotions come to me while I am playing and those emotions

can either help me or hurt me. If I can reconcile my emotions with my logic

and only act when they are aligned, I make better decisions.

Learning how reality works, visualizing the things I want to create, and

then building them out is incredibly exciting to me. Stretching for big goals

puts me in the position of failing and needing to learn and come up with new

inventions in order to move forward. I find it exhilarating being caught up in

the feedback loop of rapid learning—just as a surfer loves riding a wave,

even though it sometimes leads to crashes. Don’t get me wrong, I’m still

scared of the crashes and I still find them painful. But I keep that pain in

perspective, knowing that I will get through these setbacks and that most of

my learning will come from reflecting on them.

Just as long-distance

runners push through pain to experience the pleasure of “runner’s high,” I

have largely gotten past the pain of my mistake making and instead enjoy the

pleasure that comes with learning from it. I believe that with practice you can

change your habits and experience the same “mistake learner’s high.”

1.1 Be a hyperrealist.

Understanding, accepting, and working with reality is both practical and

beautiful. I have become so much of a hyperrealist that I’ve learned to

appreciate the beauty of all realities, even harsh ones, and have come to

despise impractical idealism.

Don’t get me wrong: I believe in making dreams happen. To me, there’s

nothing better in life than doing that. The pursuit of dreams is what gives life

its flavor. My point is that people who create great things aren’t idle

dreamers: They are totally grounded in reality. Being hyperrealistic will help

you choose your dreams wisely and then achieve them. I have found the

following to be almost always true:

a. Dreams + Reality + Determination = A Successful Life. People who achieve

success and drive progress deeply understand the cause-effect relationships

that govern reality and have principles for using them to get what they want.

The converse is also true: Idealists who are not well grounded in reality

create problems, not progress.

What does a successful life look like? We all have our own deep-seated

needs, so we each have to decide for ourselves what success is. I don’t care

whether you want to be a master of the universe, a couch potato, or anything

else—I really don’t. Some people want to change the world and others want

to operate in simple harmony with it and savor life. Neither is better. Each of

us needs to decide what we value most and choose the paths we take to

achieve it.

Take a moment to reflect on where you are on the following scale, which

illustrates an overly simplified choice you should think about. Where would

you put yourself on it?

The question isn’t just how much of each to go after, but how hard to work

to get as much as possible. I wanted crazy amounts of each, was thrilled to

work hard to get as much of them as possible, and found that they could

largely be one and the same and mutually reinforcing. Over time I learned

that getting more out of life wasn’t just a matter of working harder at it. It

was much more a matter of working effectively, because working effectively

could increase my capacity by hundreds of times. I don’t care what you want

or how hard you want to work for it. That’s for you to decide. I’m just trying

to pass along to you what has helped me get the most out of each hour of time

and each unit of effort.

Most importantly, I’ve learned that there is no escaping the fact that:

1.2 Truth—or, more precisely, an accurate

understanding of reality—is the essential

foundation for any good outcome.

Most people fight seeing what’s true when it’s not what they want it to be.

That’s bad, because it is more important to understand and deal with the bad

stuff since the good stuff will take care of itself.

Do you agree with that? If not, you are unlikely to benefit from what

follows. If you do agree, let’s build on it.

1.3 Be radically open-minded and radically

transparent.

None of us is born knowing what is true; we either have to discover what’s

true for ourselves or believe and follow others. The key is to know which

path will yield better results.

I believe that:

a. Radical open-mindedness and radical transparency are invaluable for rapid

learning and effective change. Learning is the product of a continuous real-time

feedback loop in which we make decisions, see their outcomes, and improve

our understanding of reality as a result. Being radically open-minded

enhances the efficiency of those feedback loops, because it makes what you

are doing, and why, so clear to yourself and others that there can’t be any

misunderstandings. The more open-minded you are, the less likely you are to

deceive yourself—and the more likely it is that others will give you honest

feedback. If they are “believable” people (and it’s very important to know

who is “believable”

), you will learn a lot from them.

Being radically transparent and radically open-minded accelerates this

learning process. It can also be difficult because being radically transparent

rather than more guarded exposes one to criticism. It’s natural to fear that.

Yet if you don’t put yourself out there with your radical transparency, you

won’t learn.

b. Don’t let fears of what others think of you stand in your way. You must be

willing to do things in the unique ways you think are best—and to open-

mindedly reflect on the feedback that comes inevitably as a result of being

that way.

Learning to be radically transparent is like learning to speak in public:

While it’s initially awkward, the more you do it, the more comfortable you

will be with it. This has been true for me. For example, I still instinctively

find being as radically transparent in the ways that I am in this book

uncomfortable because I am exposing personal material to the public that will

attract attention and criticism. Yet I am doing it because I’ve learned that it’s

best, and I wouldn’t feel good about myself if I let my fears stand in the way.

In other words, I have experienced the positive effects of radical transparency

for so long that it’s now uncomfortable for me not to be that way.

Besides giving me the freedom to be me, it has allowed me to understand

others and for them to understand me, which is much more efficient and

much more enjoyable than not having this understanding. Imagine how many

fewer misunderstandings we would have and how much more efficient the

world would be—and how much closer we all would be to knowing what’s

true—if instead of hiding what they think, people shared it openly. I’m not

talking about everyone’s very personal inner secrets; I’m talking about

people’s opinions of each other and of how the world works. As you’ll see,

I’ve learned firsthand how powerful this kind of radical truth and

transparency is in improving my decision making and my relationships. So

whenever I’m faced with the choice, my instinct is to be transparent. I

practice it as a discipline and I recommend you do the same.

c. Embracing radical truth and radical transparency will bring more meaningful

work and more meaningful relationships. My experience, based on watching

thousands of people try this approach, is that with practice the vast majority

find it so rewarding and pleasurable that they have a hard time operating any

other way.

This takes practice and changing one’s habits. I have found that it

typically takes about eighteen months, which is how long it takes to change

most habits.

1.4 Look to nature to learn how reality works.

All the laws of reality were given to us by nature. Man didn’t create these

laws, but by understanding them we can use them to foster our own evolution

and achieve our goals. For example, our ability to fly or to send cell phone

signals around the world came from understanding and applying the existing

rules of reality—the physical laws or principles that govern the natural world.

While I spend most of my time studying the realities that affect me most

directly—those that drive economies, the markets, and the people I deal with

—I also spend time in nature and can’t help reflecting on how it works by

observing, reading, and speaking with some of the greatest specialists on the

subject. I’ve found it both interesting and valuable to observe which laws we

humans have in common with the rest of nature and which differentiate us.

Doing that has had a big impact on my approach to life.

First of all, I see how cool it is that the brain’s evolution gave us the

ability to reflect on how reality works in this way. Man’s most distinctive

quality is our singular ability to look down on reality from a higher

perspective and synthesize an understanding of it. While other species

operate by following their instincts, man alone can go above himself and look

at himself within his circumstances and within time (including before and

after his existence). For example, we can ponder the ways that nature’s flying

machines, swimming machines, and billions of other machines, from the

microscopic to the cosmic, interact with one another to make up a working

whole that evolves through time. This is because the evolution of the brain

gave man a much more developed neocortex, which gives us the power to

think abstractly and logically.

While our higher-level thinking makes us unique among species, it can

also make us uniquely confused. Other species have much simpler and more

straightforward lives, without any of man’s wrestling with what’s good and

what’s bad. In contrast with animals, most people struggle to reconcile their

emotions and their instincts (which come from the animal parts of their

brains) with their reasoning (which comes from parts of the brain more

developed in humans). This struggle causes people to confuse what they want

to be true with what actually is true. Let’s look at this dilemma to try to

understand how reality works.

When trying to understand anything—economies, markets, the weather,

whatever—one can approach the subject with two perspectives:

1. Top down: By trying to find the one code/law that drives them all. For

example, in the case of markets, one could study universal laws like

supply and demand that affect all economies and markets. In the case of

species, one could focus on learning how the genetic code (DNA)

works for all species.

2. Bottom up: By studying each specific case and the codes/laws that are

true for them, for example, the codes or laws particular to the market

for wheat or the DNA sequences that make ducks different from other

species.

Seeing things from the top down is the best way to understand ourselves

and the laws of reality within the context of overarching universal laws.

That’s not to say it’s not worth having a bottom-up perspective. In fact, to

understand the world accurately you need both. By taking a bottom-up

perspective that looks at each individual case, we can see how it lines up with

our theories about the laws that we expect to govern it. When they line up,

we’re good.

By looking at nature from the top down, we can see that much of what we

call human nature is really animal nature. That’s because the human brain is

programmed with millions of years of genetic learning that we share with

other species. Because we share common roots and common laws, we and

other animals have similar attributes and constraints. For example, the

male/female sexual reproduction process, using two eyes to provide depth

perception, and many other systems are shared by many species in the animal

kingdom. Similarly, our brains have some “animal” parts that are much older

in evolutionary terms than humanity is. These laws that we have in common

are the most overarching ones. They wouldn’t be apparent to us if we just

looked at ourselves.

If you just looked at one species—ducks, for example—to try to

understand the universal laws, you’d fail. Similarly, if you just looked at

mankind to understand the universal laws, you’d fail. Man is just one of ten

million species and just one of the billions of manifestations of the forces that

bring together and take apart atoms through time. Yet most people are like

ants focused only on themselves and their own anthill; they believe the

universe revolves around people and don’t pay attention to the universal laws

that are true for all species.

To try to figure out the universal laws of reality and principles for dealing

with it, I’ve found it helpful to try to look at things from nature’s perspective.

While mankind is very intelligent in relation to other species, we have the

intelligence of moss growing on a rock compared to nature as a whole. We

are incapable of designing and building a mosquito, let alone all the species

and most of the other things in the universe. So I start from the premise that

nature is smarter than I am and try to let nature teach me how reality works.

a. Don’t get hung up on your views of how things “should” be because you will miss

out on learning how they really are. It’s important not to let our biases stand in

the way of our objectivity. To get good results, we need to be analytical

rather than emotional.

Whenever I observe something in nature that I (or mankind) think is

wrong, I assume that I’m wrong and try to figure out why what nature is

doing makes sense. That has taught me a lot. It has changed my thinking

about 1) what’s good and what’s bad, 2) what my purpose in life is, and 3)

what I should do when faced with my most important choices. To help

explain why, I will give you a simple example.

When I went to Africa a number of years ago, I saw a pack of hyenas take

down a young wildebeest. My reaction was visceral. I felt empathy for the

wildebeest and thought that what I had witnessed was horrible. But was that

because it was horrible or was it because I am biased to believe it’s horrible

when it is actually wonderful? That got me thinking. Would the world be a

better or worse place if what I’d seen hadn’t occurred? That perspective

drove me to consider the second- and third-order consequences so that I

could see that the world would be worse. I now realize that nature optimizes

for the whole, not for the individual, but most people judge good and bad

based only on how it affects them. What I had seen was the process of nature

at work, which is much more effective at furthering the improvement of the

whole than any process man has ever invented.

Most people call something bad if it is bad for them or bad for those they

empathize with, ignoring the greater good. This tendency extends to groups:

One religion will consider its beliefs good and another religion’s beliefs bad

to such an extent that their members might kill each other in the mutual

conviction that each is doing what’s right. Typically, people’s conflicting

beliefs or conflicting interests make them unable to see things through

another’s eyes. That’s not good and it doesn’t make sense. While I could

understand people liking something that helps them and disliking things that

hurt them, it doesn’t make sense to call something good or bad in an absolute

sense based only on how it affects individuals. To do so would presume that

what the individual wants is more important than the good of the whole. To

me, nature seems to define good as what’s good for the whole and optimizes

for it, which is preferable. So I have come to believe that as a general rule:

b. To be “good” something must operate consistently with the laws of reality and

contribute to the evolution of the whole; that is what is most rewarded. For example,

if you come up with something the world values, you almost can’t help but be

rewarded. Conversely, reality tends to penalize those people, species, and

things that don’t work well and detract from evolution.

In looking at what is true for everything, I have come to believe that:

c. Evolution is the single greatest force in the universe; it is the only thing that is

permanent and it drives everything.

Everything from the smallest subatomic

particle to the entire galaxy is evolving. While everything apparently dies or

disappears in time, the truth is that it all just gets reconfigured in evolving

forms. Remember that energy can’t be destroyed—it can only be

reconfigured. So the same stuff is continuously falling apart and coalescing in

different forms. The force behind that is evolution.

For example, the primary purpose of every living thing is to act as a vessel

for the DNA that evolves life through time. The DNA that exists within each

individual came from an eternity ago and will continue to live long after its

individual carriers pass away, in increasingly evolved forms.

As I thought about evolution, I realized that it exists in other forms than

life and is carried out through other transmission mechanisms than DNA.

Technologies, languages, and everything else evolves. Knowledge, for

example, is like DNA in that it is passed from generation to generation and

evolves; its impact on people over many generations can be as great or

greater than that of the genetic code.

Evolution is good because it is the process of adaptation that generally

moves things toward improvement. All things such as products,

organizations, and human capabilities evolve through time in a similar way. It

is simply the process by which things either adapt and improve or die. To me

this evolutionary process looks like what you see on the right:

Evolution consists of adaptations/inventions that provide spurts of benefits

that decline in value. That painful decline leads either to new adaptations and

new inventions that bring new products, organizations, and human

capabilities to new and higher levels of development (as shown in the top

diagram on the facing page); or decline and death, which looks like the

diagram at bottom left.

Think of any product, organization, or person you know and you will see

that this is true. The world is littered with once-great things that deteriorated

and failed; only a rare few have kept reinventing themselves to go on to new

heights of greatness. All machines eventually break down, decompose, and

have their parts recycled to create new machines. That includes us.

Sometimes this makes us sad because we’ve become attached to our

machines, but if you look at it from the higher level, it’s really beautiful to

observe how the machine of evolution works.

From this perspective, we can see that perfection doesn’t exist; it is a goal

that fuels a never-ending process of adaptation. If nature, or anything, were

perfect it wouldn’t be evolving. Organisms, organizations, and individual

people are always highly imperfect but capable of improving. So rather than

getting stuck hiding our mistakes and pretending we’re perfect, it makes

sense to find our imperfections and deal with them. You will either learn

valuable lessons from your mistakes and press on, better equipped to succeed

—or you won’t and you will fail.

As the saying goes:

d. Evolve or die. This evolutionary cycle is not just for people but for countries,

companies, economies—for everything. And it is naturally self-correcting as

a whole, though not necessarily for its parts. For example, if there is too

much supply and waste in a market, prices will go down, companies will go

out of business, and capacity will be reduced until the supply falls in line with

the demand, at which time the cycle will start to move in the opposite

direction. Similarly, if an economy turns bad enough, those responsible for

running it will make the political and policy changes that are needed—or they

will not survive, making room for their replacements to come along. These

cycles are continuous and play out in logical ways—and they tend to be self-

reinforcing.

The key is to fail, learn, and improve quickly. If you’re constantly learning

and improving, your evolutionary process will look like the one that’s

ascending. Do it poorly and it will look like what you see on the left, or

worse.

I believe that:

1.5 Evolving is life’s greatest accomplishment and its

greatest reward.

It is instinctually that way, which is why most of us feel the pull of it—in

other words, we instinctively want to get better at things and have created and

evolved technology to help us. History has shown that all species will either

go extinct or evolve into other species, though with our limited time window

that is hard for us to see. But we do know that what we call mankind was

simply the result of DNA evolving into a new form about two hundred

thousand years ago, and we know that mankind will certainly either go

extinct or evolve into a higher state. I personally believe there is a good

chance man will begin to evolve at an accelerating pace with the help of man-

made technologies that can analyze vast amounts of data and “think” faster

and better than we can. I wonder how many centuries it will take for us to

evolve into a higher-level species that will be much closer to omniscience

than we are now—if we don’t destroy ourselves first.

One of the great marvels of nature is how the whole system, which is full

of individual organisms acting in their own self-interest and without

understanding or guiding what’s going on, can create a beautifully operating

and evolving whole. While I’m not an expert at this, it seems that it’s because

evolution has produced a) incentives and interactions that lead to individuals

pursuing their own interests and resulting in the advancement of the whole, b)

the natural selection process, and c) rapid experimentation and adaptation.

a. The individual’s incentives must be aligned with the group’s goals.To give you a

quick example of nature creating incentives that lead to individuals pursuing

their own interests that result in the advancement of the whole, look at sex

and natural selection. Nature gave us one hell of an incentive to have sex in

the form of the great pleasure it provides, even though the purpose of having

sex is to contribute to the advancement of the DNA. That way, we

individually get what we want while contributing to the evolution of the

whole.

b. Reality is optimizing for the whole—not for you. Contribute to the whole and

you will likely be rewarded. Natural selection leads to better qualities being

retained and passed along (e.g., in better genes, better abilities to nurture

others, better products, etc.). The result is a constant cycle of improvement

for the whole.

c. Adaptation through rapid trial and error is invaluable. Natural selection’s trial-

and-error process allows improvement without anyone understanding or

guiding it. The same can apply to how we learn. There are at least three kinds

of learning that foster evolution: memory-based learning (storing the

information that comes in through one’s conscious mind so that we can recall

it later); subconscious learning (the knowledge we take away from our

experiences that never enters our conscious minds, though it affects our

decision making); and “learning” that occurs without thinking at all, such as

the changes in DNA that encode a species’ adaptations. I used to think that

memory-based, conscious learning was the most powerful, but I’ve since

come to understand that it produces less rapid progress than experimentation

and adaptation. To give you an example of how nature improves without

thinking, just look at the struggle that mankind (with all its thinking) has

experienced in trying to outsmart viruses (which don’t even have brains).

Viruses are like brilliant chess opponents. By evolving quickly (combining

different genetic material across different strains), they keep the smartest

minds in the global health community busy thinking up countermoves to hold

them off. Understanding that is especially helpful in an era when computers

can run large numbers of simulations replicating the evolutionary process to

help us see what works and what doesn’t.

In the next chapter I will describe a process that has helped me, and I

believe can help you, evolve quickly. But first I want to emphasize how

important your perspective is in trying to decide what is important to you and

what to go after.

d. Realize that you are simultaneously everything and nothing—and decide what you

want to be. It is a great paradox that individually we are simultaneously

everything and nothing. Through our own eyes, we are everything—e.g.,

when we die, the whole world disappears. So to most people (and to other

species) dying is the worst thing possible, and it is of paramount importance

that we have the best life possible. However, when we look down on

ourselves through the eyes of nature we are of absolutely no significance. It is

a reality that each one of us is only one of about seven billion of our species

alive today and that our species is only one of about ten million species on

our planet. Earth is just one of about 100 billion planets in our galaxy, which

is just one of about two trillion galaxies in the universe. And our lifetimes are

only about 1/3,000 of humanity’s existence, which itself is only 1/20,000 of

the Earth’s existence. In other words, we are unbelievably tiny and short-

lived and no matter what we accomplish, our impact will be insignificant. At

the same time, we instinctually want to matter and to evolve, and we can

matter a tiny bit—and it’s all those tiny bits that add up to drive the evolution

of the universe.

The question is how we matter and evolve. Do we matter to others (who

also don’t matter in the grand scope of things) or in some greater sense that

we will never actually achieve? Or does it not matter if we matter so we

should forget about the question and just enjoy our lives while they last?

e. What you will be will depend on the perspective you have. Where you go in life

will depend on how you see things and who and what you feel connected to

(your family, your community, your country, mankind, the whole ecosystem,

everything). You will have to decide to what extent you will put the interests

of others above your own, and which others you will choose to do so for.

That’s because you will regularly encounter situations that will force you to

make such choices.

While such decisions might seem too erudite for your taste, you will make

them either consciously or subliminally, and they will be very important.

For me personally, I now find it thrilling to embrace reality, to look down

on myself through nature’s perspective, and to be an infinitesimally small

part of the whole. My instinctual and intellectual goal is simply to evolve and

contribute to evolution in some tiny way while I’m here and while I am what

I am. At the same time, the things I love most—my work and my

relationships—are what motivate me. So, I find how reality and nature work,

including how I and everything will decompose and recompose, beautiful—

though emotionally I find the separation from those I care about difficult to

appreciate.

1.6 Understand nature’s practical lessons.

I have found understanding how nature and evolution work helpful in a

number of ways. Most importantly, it has helped me deal with my realities

more effectively and make difficult choices. When I began to look at reality

through the perspective of figuring out how it really works, instead of

thinking things should be different, I realized that most everything that at first

seemed “bad” to me—like rainy days, weaknesses, and even death—was

because I held preconceived notions of what I personally wanted. With time,

I learned that my initial reaction was because I hadn’t put whatever I was

reacting to in the context of the fact that reality is built to optimize for the

whole rather than for me.

a. Maximize your evolution. Earlier, I mentioned that the unique abilities of

thinking logically, abstractly, and from a higher level are carried out in

structures located in the neocortex. These parts of the brain are more

developed in humans and allow us to reflect on ourselves and direct our own

evolution. Because we are capable of conscious, memory-based learning, we

can evolve further and faster than any other species, changing not just across

generations but within our own lifetimes.

This constant drive toward learning and improvement makes getting better

innately enjoyable and getting better fast exhilarating. Though most people

think that they are striving to get the things (toys, bigger houses, money,

status, etc.) that will make them happy, for most people those things don’t

supply anywhere near the long-term satisfaction that getting better at

something does.

Once we get the things we are striving for, we rarely

remain satisfied with them. The things are just the bait. Chasing after them

forces us to evolve, and it is the evolution and not the rewards themselves

that matters to us and to those around us. This means that for most people

success is struggling and evolving as effectively as possible, i.e., learning

rapidly about oneself and one’s environment, and then changing to improve.

It is natural that it should be this way because of the law of diminishing

returns.

Consider what acquiring money is like. People who earn so much

that they derive little or no marginal gains from it will experience negative

consequences, as with any other form of excess, like gluttony. If they are

intellectually healthy, they will begin seeking something new or seeking new

depths in something old—and they will get stronger in the process. As Freud

put it, “Love and work are the cornerstones of our humanness.”

The work doesn’t necessarily have to be a job, though I believe it’s

generally better if it is a job. It can be any kind of long-term challenge that

leads to personal improvement. As you might have guessed, I believe that the

need to have meaningful work is connected to man’s innate desire to

improve. And relationships are the natural connections to others that make us

relevant to each other and to society more broadly.

b. Remember “no pain, no gain.” Realizing that we innately want to evolve—

and that the other stuff we are going after, while nice, won’t sustain our

happiness—has helped me focus on my goals of evolving and contributing to

evolution in my own infinitely small way. While we don’t like pain,

everything that nature made has a purpose, so nature gave us pain for a

purpose. So what is its purpose? It alerts us and helps direct us.

c. It is a fundamental law of nature that in order to gain strength one has to push

one’s limits, which is painful. As Carl Jung put it, “Man needs difficulties. They

are necessary for health.” Yet most people instinctually avoid pain. This is

true whether we are talking about building the body (e.g., weight lifting) or

the mind (e.g., frustration, mental struggle, embarrassment, shame)—and

especially true when people confront the harsh reality of their own

imperfections.

1.7 Pain + Reflection = Progress.

There is no avoiding pain, especially if you’re going after ambitious goals.

Believe it or not, you are lucky to feel that kind of pain if you approach it

correctly, because it is a signal that you need to find solutions so you can

progress. If you can develop a reflexive reaction to psychic pain that causes

you to reflect on it rather than avoid it, it will lead to your rapid

learning/evolving.

After seeing how much more effective it is to face the

painful realities that are caused by your problems, mistakes, and weaknesses,

I believe you won’t want to operate any other way. It’s just a matter of

getting in the habit of doing it.

Most people have a tough time reflecting when they are in pain and they

pay attention to other things when the pain passes, so they miss out on the

reflections that provide the lessons. If you can reflect well while you’re in

pain (which is probably too much to ask), great. But if you can remember to

reflect after it passes, that’s valuable too. (I created a Pain Button app to help

people do this, which I describe in the appendix.)

The challenges you face will test and strengthen you. If you’re not failing,

you’re not pushing your limits, and if you’re not pushing your limits, you’re

not maximizing your potential. Though this process of pushing your limits, of

sometimes failing and sometimes breaking through—and deriving benefits

from both your failures and your successes—is not for everyone, if it is for

you, it can be so thrilling that it becomes addictive. Life will inevitably bring

you such moments, and it’ll be up to you to decide whether you want to go

back for more.

If you choose to push through this often painful process of personal

evolution, you will naturally “ascend” to higher and higher levels. As you

climb above the blizzard of things that surrounds you, you will realize that

they seem bigger than they really are when you are seeing them up close; that

most things in life are just “another one of those.” The higher you ascend, the

more effective you become at working with reality to shape outcomes toward

your goals. What once seemed impossibly complex becomes simple.

a. Go to the pain rather than avoid it. If you don’t let up on yourself and instead

become comfortable always operating with some level of pain, you will

evolve at a faster pace. That’s just the way it is.

Every time you confront something painful, you are at a potentially

important juncture in your life—you have the opportunity to choose healthy

and painful truth or unhealthy but comfortable delusion. The irony is that if

you choose the healthy route, the pain will soon turn into pleasure. The pain

is the signal! Like switching from not exercising to exercising, developing

the habit of embracing the pain and learning from it will “get you to the other

side.”

By “getting to the other side,” I mean that you will become hooked on:

• Identifying, accepting, and learning how to deal with your weaknesses,

• Preferring that the people around you be honest with you rather than keep

their negative thoughts about you to themselves, and

• Being yourself rather than having to pretend to be strong where you are

weak.

b. Embrace tough love. In my own life, what I want to give to people, most

importantly to people I love, is the power to deal with reality to get what they

want. In pursuit of my goal to give them strength, I will often deny them what

they “want” because that will give them the opportunity to struggle so that

they can develop the strength to get what they want on their own. This can be

difficult for people emotionally, even if they understand intellectually that

having difficulties is the exercise they need to grow strong and that just

giving them what they want will weaken them and ultimately lead to them

needing more help.

Of course most people would prefer not to have weaknesses. Our

upbringings and our experiences in the world have conditioned us to be

embarrassed by our weaknesses and hide them. But people are happiest when

they can be themselves. If you can be open with your weaknesses it will

make you freer and will help you deal with them better. I urge you to not be

embarrassed about your problems, recognizing that everyone has them.

Bringing them to the surface will help you break your bad habits and develop

good ones, and you will acquire real strengths and justifiable optimism.

This evolutionary process of productive adaptation and ascent—the

process of seeking, obtaining, and pursuing more and more ambitious goals

—does not just pertain to how individuals and society move forward. It is

equally relevant when dealing with setbacks, which are inevitable. At some

point in your life you will crash in a big way. You might fail at your job or

with your family, lose a loved one, suffer a serious accident or illness, or

discover the life you imagined is out of reach forever. There are a whole host

of ways that something will get you. At such times, you will be in pain and

might think that you don’t have the strength to go on. You almost always do,

however; your ultimate success will depend on you realizing that fact, even

though it might not seem that way at the moment.

This is why many people who have endured setbacks that seemed

devastating at the time ended up as happy as (or even happier than) they

originally were after they successfully adapted to them. The quality of your

life will depend on the choices you make at those painful moments. The

faster one appropriately adapts, the better.

No matter what you want out of

life, your ability to adapt and move quickly and efficiently through the

process of personal evolution will determine your success and your

happiness. If you do it well, you can change your psychological reaction to it

so that what was painful can become something you crave.

1.8 Weigh second- and third-order consequences.

By recognizing the higher-level consequences nature optimizes for, I’ve

come to see that people who overweigh the first-order consequences of their

decisions and ignore the effects of second- and subsequent-order

consequences rarely reach their goals. This is because first-order

consequences often have opposite desirabilities from second-order

consequences, resulting in big mistakes in decision making. For example, the

first-order consequences of exercise (pain and time spent) are commonly

considered undesirable, while the second-order consequences (better health

and more attractive appearance) are desirable. Similarly, food that tastes good

is often bad for you and vice versa.

Quite often the first-order consequences are the temptations that cost us

what we really want, and sometimes they are the barriers that stand in our

way. It’s almost as though nature sorts us by throwing us trick choices that

have both types of consequences and penalizing those who make their

decisions on the basis of the first-order consequences alone.

By contrast, people who choose what they really want, and avoid the

temptations and get over the pains that drive them away from what they

really want, are much more likely to have successful lives.

1.9 Own your outcomes.

For the most part, life gives you so many decisions to make and so many

opportunities to recover from your mistakes that, if you handle them well,

you can have a terrific life. Of course, sometimes there are major influences

on the quality of our lives that come from things beyond our control—the

circumstances we are born into, accidents and illnesses, and so forth—but for

the most part even the worst circumstances can be made better with the right

approach. For example, a friend of mine dove into a swimming pool, hit his

head, and became a quadriplegic. But he approached his situation well and

became as happy as anybody else, because there are many paths to happiness.

My point is simply this: Whatever circumstances life brings you, you will

be more likely to succeed and find happiness if you take responsibility for

making your decisions well instead of complaining about things being

beyond your control. Psychologists call this having an “internal locus of

control,” and studies consistently show that people who have it outperform

those who don’t.

So don’t worry about whether you like your situation or not. Life doesn’t

give a damn about what you like. It’s up to you to connect what you want

with what you need to do to get it and then find the courage to carry it

through. In the next chapter I will show you the 5-Step Process that helped

me learn about reality and evolve.

1.10 Look at the machine from the higher level.

Our uniquely human ability to look down from a higher level doesn’t apply

just to understanding reality and the cause-effect relationships underlying it;

it also applies to looking down on yourself and those around you. I call this

ability to rise above your own and others’ circumstances and objectively look

down on them “higher-level thinking.” Higher-level thinking gives you the

ability to study and influence the cause-effect relationships at play in your life

and use them to get the outcomes you want.

a. Think of yourself as a machine operating within a machine and know that you have

the ability to alter your machines to produce better outcomes. You have your goals.

I call the way you will operate to achieve your goals your machine. It consists

of a design (the things that have to get done) and the people (who will do the

things that need getting done). Those people include you and those who help

you. For example, imagine that your goal is a military one: to take a hill from

an enemy. Your design for your “machine” might include two scouts, two

snipers, four infantrymen, and so on. While the right design is essential, it is

only half the battle. It is equally important to put the right people in each of

those positions. They need different qualities to do their jobs well—the

scouts must be fast runners, the snipers must be good marksmen—so that the

machine will produce the outcomes you seek.

b. By comparing your outcomes with your goals, you can determine how to modify

your machine. This evaluation and improvement process exactly mirrors the

evolutionary process I described earlier. It means looking at how to improve

or change the design or people to achieve your goals. Schematically, the

process is a feedback loop, as shown in the diagram on the opposite page.

c. Distinguish between you as the designer of your machine and you as a worker with

your machine. One of the hardest things for people to do is to objectively look

down on themselves within their circumstances (i.e., their machine) so that

they can act as the machine’s designer and manager. Most people remain

stuck in the perspective of being a worker within the machine. If you can

recognize the differences between those roles and that it is much more

important that you are a good designer/manager of your life than a good

worker in it, you will be on the right path. To be successful, the

“designer/manager you” has to be objective about what the “worker you” is

really like, not believing in him more than he deserves, or putting him in jobs

he shouldn’t be in. Instead of having this strategic perspective, most people

operate emotionally and in the moment; their lives are a series of undirected

emotional experiences, going from one thing to the next. If you want to look

back on your life and feel you’ve achieved what you wanted to, you can’t

operate that way.

d. The biggest mistake most people make is to not see themselves and others

objectively, which leads them to bump into their own and others’ weaknesses again

and again. People who do this fail because they are stubbornly stuck in their

own heads. If they could just get around this, they could live up to their

potential.

This is why higher-level thinking is essential for success.

e. Successful people are those who can go above themselves to see things objectively

and manage those things to shape change. They can take in the perspectives of

others instead of being trapped in their own heads with their own biases.

They are able to look objectively at what they are like—their strengths and

weaknesses—and what others are like to put the right people in the right roles

to achieve their goals. Once you understand how to do this you’ll see that

there’s virtually nothing you can’t accomplish. You will just have to learn

how to face your realities and use the full range of resources at your disposal.

For example, if you as the designer/manager discover that you as the worker

can’t do something well, you need to fire yourself as the worker and get a

good replacement, while staying in the role of designer/manager of your own

life. You shouldn’t be upset if you find out that you’re bad at something—

you should be happy that you found out, because knowing that and dealing

with it will improve your chances of getting what you want.

If you are disappointed because you can’t be the best person to do

everything yourself, you are terribly naive. Nobody can do everything well.

Would you want to have Einstein on your basketball team? When he fails to

dribble and shoot well, would you think badly of him? Should he feel

humiliated? Imagine all the areas in which Einstein was incompetent, and

imagine how hard he struggled to excel even in the areas in which he was the

best in the world.

Watching people struggle and having others watch you struggle can elicit

all kinds of ego-driven emotions such as sympathy, pity, embarrassment,

anger, or defensiveness. You need to get over all that and stop seeing

struggling as something negative. Most of life’s greatest opportunities come

out of moments of struggle; it’s up to you to make the most of these tests of

creativity and character.

When encountering your weaknesses you have four choices:

1. You can deny them (which is what most people do).

2. You can accept them and work at them in order to try to convert them

into strengths (which might or might not work depending on your

ability to change).

3. You can accept your weaknesses and find ways around them.

4. Or, you can change what you are going after.

Which solution you choose will be critically important to the direction of

your life. The worst path you can take is the first. Denial can only lead to

your constantly banging up against your weaknesses, having pain, and not

getting anywhere. The second—accepting your weaknesses while trying to

turn them into strengths—is probably the best path if it works. But some

things you will never be good at and it takes a lot of time and effort to

change. The best single clue as to whether you should go down this path is

whether the thing you are trying to do is consistent with your nature (i.e.,

your natural abilities). The third path—accepting your weaknesses while

trying to find ways around them—is the easiest and typically the most viable

path, yet it is the one least followed. The fourth path, changing what you are

going after, is also a great path, though it requires flexibility on your part to

get past your preconceptions and enjoy the good fit when you find it.

f. Asking others who are strong in areas where you are weak to help you is a great

skill that you should develop no matter what, as it will help you develop guardrails

that will prevent you from doing what you shouldn’t be doing. All successful

people are good at this.

g. Because it is difficult to see oneself objectively, you need to rely on the input of

others and the whole body of evidence. I know that my own life has been full of

mistakes and lots of great feedback. It was only by looking down on this

body of evidence from a higher level that I was able to get around my

mistakes and go after what I wanted. For as long as I have been practicing

this, I still know I can’t see myself objectively, which is why I continue to

rely so much on the input of others.

h. If you are open-minded enough and determined, you can get virtually anything you

want. So I certainly don’t want to dissuade you from going after whatever you

want. At the same time, I urge you to reflect on whether what you are going

after is consistent with your nature. Whatever your nature is, there are many

paths that will suit you, so don’t fixate on just one. Should a particular path

close, all you have to do is find another good one consistent with what you’re

like. (You’ll learn a lot about how to determine what you’re like later, in

Understand That People Are Wired Very Differently.)

But most people lack the courage to confront their own weaknesses and

make the hard choices that this process requires. Ultimately, it comes down

to the following five decisions:

1. Don’t confuse what you wish were true with what is really true.

2. Don’t worry about looking good—worry instead about achieving your goals.

3. Don’t overweight first-order consequences relative to second- and third-order ones.

4. Don’t let pain stand in the way of progress.

5. Don’t blame bad outcomes on anyone but yourself.

14 I’m sure Transcendental Meditation, which I have been practicing regularly for nearly

half a century, helped provide me with the equanimity I needed to approach my challenges

this way.

15 You shouldn’t assume that you are always the best person to make decisions for

yourself because often you aren’t. While it is up to us to know what we want, others may

know how to get it better than we do because they have strengths where we have

weaknesses, or more relevant knowledge and experience. For example, it’s probably better

for  you  to  follow  your  doctor’s  advice  than  your  own  if  you  have  a  medical  condition.
Later in this book, we will look at some of the different ways people’s brains are wired and
how  our  understanding  of  our  own  wiring  should  influence  which  choices  we  make  for
ourselves and which we should delegate to others. Knowing when not to make your own
decisions is one of the most important skills you can develop.
16 I’ll explain the concept of believability in more detail in later chapters, but to cover it
quickly: Believable parties are those who  have repeatedly and successfully accomplished
something—and have great explanations for how they did it.
17  There  are  many  things  people  consider  “good”  in  the  sense  that  they  are  kind  or
considerate but fail to deliver what’s desired (like communism’s “from each according to
his ability, to each according to his needs”). Nature would appear to consider them “bad,”
and I’d agree with nature.
18 Everything other than evolution eventually disintegrates; we all are, and everything else
is,  vehicles  for  evolution.  For  example,  while  we  see  ourselves  as  individuals,  we  are
essentially vessels for our genes that have lived millions of years and continuously use and
shed bodies like ours.
19  I  recommend  Richard  Dawkins’s  and  E.  O.  Wilson’s  books  on  evolution.  If  I  had  to
pick just one, it would be Dawkins’s River Out of Eden.
20 Of course, we are often satisfied with the same things—relationships, careers, etc.—but
when  that  is  the  case,  it  is  typically  because  we  are  getting  new  enjoyments  from  the
changing dimensions of those things.
21 The marginal benefits of moving from a shortage to an abundance of anything decline.
22 Your unique power of reflectiveness—your ability to look at yourself, the world around
you, and the relationship between you and the world—means that you can think deeply and
weigh  subtle  things  to  come  up  with  learning  and  wise  choices.  Asking  other  believable
people  about  the  root  causes  of  your  pain  in  order  to  enhance  your  reflections  is  also
typically  very  helpful—especially  others  who  have  opposing  views  but  who  share  your
interest in finding the truth rather than being proven right. If you can reflect deeply about
your problems, they almost always shrink or disappear, because you almost always find a
better way of dealing with them than if you don’t face them head-on.
23 To be clear, I am not saying people should not be helped. I believe that people should be
helped by giving them opportunities and the coaching they need to become strong enough
to  take  advantage  of  their  opportunities.  As  the saying  goes,  “God  helps  those  who  help
themselves.” But this isn’t easy, especially with people you care about. To be effective in
helping  people  learn  from  painful  experiences,  you  must  explain  the  logic  and  caring
behind  what  you’re  doing  clearly  and  repeatedly.  As  you  read  in  “Where  I’m  Coming
From,” this was a large part of what compelled me to explain my principles.

24 Your ability to see the changing landscape and adapt is more a function of your

perception and reasoning than your ability to learn and process quickly.

BAD

Avoid facing “harsh

realities.”

GOOD

Face “harsh realities.”

BAD

Worry about appearing

good.

GOOD

Worry about achieving the

goal.

BAD

Make your decisions on the

basis of first-order

consequences.

GOOD

Make your decisions on the

basis of first-, second-, and

third-order consequences.

BAD

Allow pain to stand in the

way of progress.

GOOD

Understand how to manage

pain to produce progress.

BAD

Don’t hold yourself and

others accountable.

GOOD

Hold yourself and others

accountable.

2 Use the 5-Step Process to Get

What You Want Out of Life

It seems to me that the personal evolutionary process—the looping I

described in the last chapter—takes place in five distinct steps. If you can do

those five things well, you will almost certainly be successful. Here they are

in a nutshell:

1. Have clear goals.

2. Identify and don’t tolerate the problems that stand in the way of your achieving those

goals.

3. Accurately diagnose the problems to get at their root causes.

4. Design plans that will get you around them.

5. Do what’s necessary to push these designs through to results.

Together, these five steps make up a loop, like the one on the facing page.

Let’s look at this process more granularly.

First you have to pick what you are going after—your goals. Your choice

of goals will determine your direction. As you move toward them, you will

encounter problems. Some of those problems will bring you up against your

own weaknesses. How you react to the pain that causes is up to you. If you

want to reach your goals, you must be calm and analytical so that you can

accurately diagnose your problems, design a plan that will get you around

them, and do what’s necessary to push through to results. Then you will look

at the new results you achieve and go through the process again. To evolve

quickly, you will have to do this fast and continuously, setting your goals

successively higher.

You will need to do all five steps well to be successful and you must do

them one at a time and in order. For example, when setting goals, just set

goals. Don’t think about how you will achieve them or what you will do if

something goes wrong. When you are diagnosing problems, don’t think about

how you will solve them—just diagnose them. Blurring the steps leads to

suboptimal outcomes because it interferes with uncovering the true problems.

The process is iterative: Doing each step thoroughly will provide you with

the information you need to move on to the next step and do it well.

It is essential that you approach this process in a clearheaded, rational

way, looking down on yourself from a higher level and being ruthlessly

honest. If your emotions are getting the better of you, step back and take time

out until you can reflect clearly. If necessary, seek guidance from calm,

thoughtful people.

To help you stay centered and effective, pretend that your life is a martial

art or a game, the object of which is to get around a challenge and reach a

goal. Once you accept its rules, you’ll get used to the discomfort that comes

with the constant frustration. You will never handle everything perfectly:

Mistakes are inevitable and it’s impor-tant to recognize and accept this fact of

life. The good news is that every mistake you make can teach you something,

so there’s no end to learning. You’ll soon realize that excuses like “that’s not

easy” or “it doesn’t seem fair” or even “I can’t do that” are of no value and

that it pays to push through.

So what if you don’t have all the skills you need to succeed? Don’t worry

about it because that’s true for everyone. You just have to know when they

are needed and where you can go to get them. With practice, you will

eventually play this game with a calm unstoppable centeredness in the face of

adversity. Your ability to get what you want will thrill you.

Now let’s look at how to approach each of the five steps.

2.1 Have clear goals.

a. Prioritize: While you can have virtually anything you want, you can’t have

everything you want. Life is like a giant smorgasbord with more delicious

alternatives than you can ever hope to taste. Choosing a goal often means

rejecting some things you want in order to get other things that you want or

need even more. Some people fail at this point, before they’ve even started.

Afraid to reject a good alternative for a better one, they try to pursue too

many goals at once, achieving few or none of them. Don’t get discouraged

and don’t let yourself be paralyzed by all the choices. You can have much

more than what you need to be happy. Make your choice and get on with it.

b. Don’t confuse goals with desires. A proper goal is something that you really

need to achieve. Desires are things that you want that can prevent you from

reaching your goals. Typically, desires are first-order consequences. For

example, your goal might be physical fitness, while your desire is to eat

good-tasting but unhealthy food. Don’t get me wrong, if you want to be a

couch potato, that’s fine with me. You can pursue whatever goals you want.

But if you don’t want to be a couch potato, then you better not open that bag

of chips.

c. Decide what you really want in life by reconciling your goals and your desires.

Take passion, for example. Without passion, life would be dull; you wouldn’t

want to live without it. But what’s key is what you do with your passion. Do

you let it consume you and drive you to irrational acts, or do you harness it to

motivate and drive you while you pursue your real goals? What will

ultimately fulfill you are things that feel right at both levels, as both desires

and goals.

d. Don’t mistake the trappings of success for success itself. Achievement

orientation is important, but people who obsess over a $1,200 pair of shoes or

a fancy car are very rarely happy because they don’t know what it is that they

really want and hence what will satisfy them.

e. Never rule out a goal because you think it’s unattainable. Be audacious. There is

always a best possible path. Your job is to find it and have the courage to

follow it. What you think is attainable is just a function of what you know at

the moment. Once you start your pursuit you will learn a lot, especially if you

triangulate with others; paths you never saw before will emerge. Of course

there are some impossibilities or near-impossibilities, such as playing center

on a professional basketball team if you’re short, or running a four-minute

mile at age seventy.

f. Remember that great expectations create great capabilities. If you limit your

goals to what you know you can achieve, you are setting the bar way too low.

g. Almost nothing can stop you from succeeding if you have a) flexibility and b) self-

accountability. Flexibility is what allows you to accept what reality (or

knowledgeable people) teaches you; self-accountability is essential because if

you really believe that failing to achieve a goal is your personal failure, you

will see your failing to achieve it as indicative that you haven’t been creative

or flexible or determined enough to do what it takes. And you will be that

much more motivated to find the way.

h. Knowing how to deal well with your setbacks is as important as knowing how to

move forward. Sometimes you know that you are going over a waterfall and

there is no way to avoid it. Life will throw you such challenges, some of

which will seem devastating at the time. In bad times, your goal might be to

keep what you have, to minimize your rate of loss, or simply to deal with a

loss that is irrevocable. Your mission is to always make the best possible

choices, knowing that you will be rewarded if you do.

2.2 Identify and don’t tolerate problems.

a. View painful problems as potential improvements that are screaming at you.

Though it won’t feel that way at first, each and every problem you encounter

is an opportunity; for that reason, it is essential that you bring them to the

surface. Most people don’t like to do this, especially if it exposes their own

weaknesses or the weaknesses of someone they care about, but successful

people know they have to.

b. Don’t avoid confronting problems because they are rooted in harsh realities that

are unpleasant to look at. Thinking about problems that are difficult to solve

may make you anxious, but not thinking about them (and hence not dealing

with them) should make you more anxious still. When a problem stems from

your own lack of talent or skill, most people feel shame. Get over it. I cannot

emphasize this enough: Acknowledging your weaknesses is not the same as

surrendering to them. It’s the first step toward overcoming them. The pains

you are feeling are “growing pains” that will test your character and reward

you as you push through them.

c. Be specific in identifying your problems. You need to be precise, because

different problems have different solutions. If a problem is due to inadequate

skill, additional training may be called for; if it arises from an innate

weakness, you may need to seek assistance from someone else or change the

role you play. In other words, if you’re bad at accounting, hire an accountant.

If a problem stems from someone else’s weaknesses, replace them with

someone who is strong where it’s needed. That’s just the way it is.

d. Don’t mistake a cause of a problem with the real problem. “I can’t get enough

sleep” is not a problem; it is a potential cause (or perhaps the result) of a

problem. To clarify your thinking, try to identify the bad outcome first; e.g.,

“I am performing poorly in my job.” Not sleeping enough may be the cause

of that problem, or the cause may be something else—but in order to

determine that, you need to know exactly what the problem is.

e. Distinguish big problems from small ones. You only have so much time and

energy; make sure you are investing them in exploring the problems that, if

fixed, will yield you the biggest returns. But at the same time, make sure you

spend enough time with the small problems to make sure they’re not

symptoms of larger ones.

f. Once you identify a problem, don’t tolerate it. Tolerating a problem has the

same consequences as failing to identify it. Whether you tolerate it because

you believe it cannot be solved, because you don’t care enough to solve it, or

because you can’t muster enough of whatever it takes to solve it, if you don’t

have the will to succeed, then your situation is hopeless. You need to develop

a fierce intolerance of badness of any kind, regardless of its severity.

2.3 Diagnose problems to get at their root causes.

a. Focus on the “what is” before deciding “what to do about it.” It is a common

mistake to move in a nanosecond from identifying a tough problem to

proposing a solution for it. Strategic thinking requires both diagnosis and

design. A good diagnosis typically takes between fifteen minutes and an

hour, depending on how well it’s done and how complex the issue is. It

involves speaking with the relevant people and looking at the evidence

together to determine the root causes. Like principles, root causes manifest

themselves over and over again in seemingly different situations. Finding

them and dealing with them pays dividends again and again.

b. Distinguish proximate causes from root causes. Proximate causes are typically

the actions (or lack of actions) that lead to problems, so they are described

with verbs (I missed the train because I didn’t check the train schedule). Root

causes run much deeper and they are typically described with adjectives (I

didn’t check the train schedule because I am forgetful). You can only truly

solve your problems by removing their root causes, and to do that, you must

distinguish the symptoms from the disease.

c. Recognize that knowing what someone (including you) is like will tell you what you

can expect from them. You will have to get over your reluctance to assess what

people are like if you want to surround yourself with people who have the

qualities you need. That goes for yourself too. People almost always find it

difficult to identify and accept their own mistakes and weaknesses.

Sometimes it’s because they’re blind to them, but more often it’s because

their egos get in the way. Most likely your associates are equally reluctant to

point out your mistakes, because they don’t want to hurt you. You all need to

get over this. More than anything else, what differentiates people who live up

to their potential from those who don’t is their willingness to look at

themselves and others objectively and understand the root causes standing in

their way.

2.4 Design a plan.

a. Go back before you go forward. Replay the story of where you have been (or

what you have done) that led up to where you are now, and then visualize

what you and others must do in the future so you will reach your goals.

b. Think about your problem as a set of outcomes produced by a machine. Practice

higher-level thinking by looking down on your machine and thinking about

how it can be changed to produce better outcomes.

c. Remember that there are typically many paths to achieving your goals. You only

need to find one that works.

d. Think of your plan as being like a movie script in that you visualize who will do

what through time. Sketch out the plan broadly at first (e.g., “hire great

people”) and then refine it. You should go from the big picture and drill down

to specific tasks and estimated time lines (e.g., “In the next two weeks,

choose the headhunters who will find those great people”). The real-world

issues of costs, time, and personnel will undoubtedly surface as you do this,

and that will lead you to further refine your design until all the gears in the

machine are meshing smoothly.

e. Write down your plan for everyone to see and to measure your progress against.

This includes all the granular details about who needs to do what tasks and

when. The tasks, the narrative, and the goals are different, so don’t mix them

up. Remember, the tasks are what connect the narrative to your goals.

f. Recognize that it doesn’t take a lot of time to design a good plan. A plan can be

sketched out and refined in just hours or spread out over days or weeks. But

the process is essential because it determines what you will have to do to be

effective. Too many people make the mistake of spending virtually no time

on designing because they are preoccupied with execution. Remember:

Designing precedes doing!

2.5 Push through to completion.

a. Great planners who don’t execute their plans go nowhere. You need to push

through and that requires self-discipline to follow your script. It’s important

to remember the connections between your tasks and the goals that they are

meant to achieve. When you feel yourself losing sight of that, stop and ask

yourself “why?” Lose sight of the why and you will surely lose sight of your

goals.

b. Good work habits are vastly underrated. People who push through

successfully have to-do lists that are reasonably prioritized, and they make

certain each item is ticked off in order.

c. Establish clear metrics to make certain that you are following your plan. Ideally,

someone other than you should be objectively measuring and reporting on

your progress. If you’re not hitting your targets, that’s another problem that

needs to be diagnosed and solved. There are many successful, creative people

who aren’t good at execution. They succeed because they forge symbiotic

relationships with highly reliable task-doers.

That’s all there is to it!

Remember that all 5 Steps proceed from your values. Your values

determine what you want, i.e., your goals. Also keep in mind that the 5 Steps

are iterative. When you complete one step, you will have acquired

information that will most likely lead you to modify the other steps. When

you’ve completed all five, you’ll start again with a new goal. If the process is

working, your goals will change more slowly than your designs, which will

change more slowly than your tasks.

One last important point: You will need to synthesize and shape well. The

first three steps—setting goals, identifying problems, and then diagnosing

them—are synthesizing (by which I mean knowing where you want to go and

what’s really going on). Designing solutions and making sure that the designs

are implemented are shaping.

2.6 Remember that weaknesses don’t matter if you

find solutions.

You almost certainly can’t do all these steps well, because each requires

different types of thinking and virtually nobody can think well in all these

ways. For example, goal setting (such as determining what you want your life

to be) requires you to be good at higher-level thinking like visualization and

prioritization. Identifying and not tolerating problems requires you to be

perceptive and good at synthesis and maintaining high standards; diagnosis

requires you to be logical, able to see multiple possibilities, and willing to

have hard conversations with others; designing requires visualization and

practicality; doing what you set out to do requires self-discipline, good work

habits, and a results orientation. Who do you know who has all those

qualities? Probably no one. Yet doing all 5 Steps well is required for being

really successful. So what do you do? First and foremost, have humility so

you can get what you need from others!

Everyone has weaknesses. They are generally revealed in the patterns of

mistakes they make. Knowing what your weaknesses are and staring hard at

them is the first step on the path to success.

a. Look at the patterns of your mistakes and identify at which step in the 5-Step

Process you typically fail. Ask others for their input too, as nobody can be fully

objective about themselves.

b. Everyone has at least one big thing that stands in the way of their success; find

yours and deal with it. Write down what your one big thing is (such as

identifying problems, designing solutions, pushing through to results) and

why it exists (your emotions trip you up, you can’t visualize adequate

possibilities). While you and most people probably have more than one major

impediment, if you can remove or get around that one really big one, you will

hugely improve your life. If you work on it, you will almost certainly be able

to deal successfully with your one big thing.

You can either fix it or you can get the help of others to deal with it well.

There are two paths to success: 1) to have what you need yourself or 2) to get

it from others. The second path requires you to have humility. Humility is as

important, or even more important, as having the strengths yourself. Having

both is best. On the following page is a template that some people find

helpful.

2.7 Understand your own and others’ mental maps

and humility.

Some people are good at knowing what to do on their own; they have good

mental maps. Maybe they acquired them from being taught; maybe they were

blessed with an especially large dose of common sense. Whatever the case,

they have more answers inside themselves than others do. Similarly, some

people are more humble and open-minded than others. Humility can be even

more valuable than having good mental maps if it leads you to seek out better

answers than you could come up with on your own. Having both open-

mindedness and good mental maps is most powerful of all.

To convey this simple concept, imagine rating from one to ten how good

someone’s mental map is (in other words, what they know) on the Y-axis and

how humble/open-minded they are on the X-axis, as shown on the opposite

page.

Everyone starts out in the lower left area, with poor mental maps and little

open-mindedness, and most people remain tragically and arrogantly stuck in

that position. You can improve by either going up on the mental-maps axis

(by learning how to do things better) or out on the open-mindedness axis.

Either will provide you with better knowledge of what to do. If you have

good mental maps and low open-mindedness, that will be good but not great.

You will still miss a lot that is of value. Similarly, if you have high open-

mindedness but bad mental maps, you will probably have challenges picking

the right people and points of view to follow. The person who has good

mental maps and a lot of open-mindedness will always beat out the person

who doesn’t have both.

Now take a minute to think about your path to becoming more effective.

Where would you place yourself on this chart? Ask others where they’d place

you.

Once you understand what you’re missing and gain open-mindedness that

will allow you to get help from others, you’ll see that there’s virtually

nothing you can’t accomplish.

Most people fail to do this most of the time. In the next chapters, I’ll

explore why and how to rectify that.

3 Be Radically Open-Minded

This is probably the most important chapter because it explains how to get

around the two things standing in most people’s way of getting what they

want out of life. These barriers exist because of the way that our brains work,

so nearly everyone encounters them.

3.1 Recognize your two barriers.

The two biggest barriers to good decision making are your ego and your blind

spots. Together, they make it difficult for you to objectively see what is true

about you and your circumstances and to make the best possible decisions by

getting the most out of others. If you can understand how the machine that is

the human brain works, you can understand why these barriers exist and how

to adjust your behavior to make yourself happier, more effective, and better at

interacting with others.

a. Understand your ego barrier. When I refer to your “ego barrier,” I’m

referring to your subliminal defense mechanisms that make it hard for you to

accept your mistakes and weaknesses. Your deepest-seated needs and fears—

such as the need to be loved and the fear of losing love, the need to survive

and the fear of not surviving, the need to be important and the fear of not

mattering—reside in primitive parts of your brain such as the amygdala,

which are structures in your temporal lobe that process emotions. Because

these areas of your brain are not accessible to your conscious awareness, it is

virtually impossible for you to understand what they want and how they

control you. They oversimplify things and react instinctively. They crave

praise and respond to criticism as an attack, even when the higher-level parts

of the brain understand that constructive criticism is good for you. They make

you defensive, especially when it comes to the subject of how good you are.

At the same time, higher-level consciousness resides in your neocortex,

more specifically in the part called the prefrontal cortex. This is the most

distinctively human feature of your brain; relative to the rest of the brain, it’s

larger in humans than in most other species. This is where you experience the

conscious awareness of decision making (the so-called “executive function”),

as well as the application of logic and reasoning.

b. Your two “yous” fight to control you. It’s like Dr. Jekyll and Mr. Hyde,

though your higher-level you is not aware of your lower-level you. This

conflict is universal; if you pay close enough attention, you can actually see

when the different parts of a person’s brain are arguing with one another. For

example, when someone gets “angry with himself,” his prefrontal cortex is

sparring with his amygdala (or other lower-level parts of his brain

). When

someone asks, “Why did I let myself eat all that cake?” the answer is

“Because the lower-level you won out over the thoughtful, higher-level you.”

Once you understand how your a) logical/conscious you and b)

emotional/subconscious you fight with each other, you can imagine what it’s

like when your two yous deal with other people and their own two “thems.”

It’s a mess. Those lower-level selves are like attack dogs—they want to fight

even when their higher-level selves want to figure things out. This is very

confusing because you and the people you are dealing with typically don’t

even know that these lower-level beasts exist, never mind that they are trying

to hijack everyone’s behavior.

Let’s look at what tends to happen when someone disagrees with you and

asks you to explain your thinking. Because you are programmed to view such

challenges as attacks, you get angry, even though it would be more logical for

you to be interested in the other person’s perspective, especially if they are

intelligent. When you try to explain your behavior, your explanations don’t

make any sense. That’s because your lower-level you is trying to speak

through your upper-level you. Your deep-seated, hidden motivations are in

control, so it is impossible for you to logically explain what “you” are doing.

Even the most intelligent people generally behave this way, and it’s tragic.

To be effective you must not let your need to be right be more important than

your need to find out what’s true. If you are too proud of what you know or

of how good you are at something you will learn less, make inferior

decisions, and fall short of your potential.

c. Understand your blind spot barrier. In addition to your ego barrier, you (and

everyone else) also have blind spots—areas where your way of thinking

prevents you from seeing things accurately. Just as we all have different

ranges for hearing pitch and seeing colors, we have different ranges for

seeing and understanding things. We each see things in our own way. For

example, some people naturally see big pictures and miss small details while

others naturally see details and miss big pictures; some people are linear

thinkers while others think laterally, and so on.

Naturally, people can’t appreciate what they can’t see. A person who can’t

identify patterns and synthesize doesn’t know what it’s like to see patterns

and synthesize any more than a color-blind person knows what it’s like to see

color. These differences in how our brains work are much less apparent than

the differences in how our bodies work. Color-blind people eventually find

out that they are color-blind, whereas most people never see or understand

the ways in which their ways of thinking make them blind. To make it even

harder, we don’t like to see ourselves or others as having blind spots, even

though we all have them. When you point out someone’s psychological

weakness, it’s generally about as well received as if you pointed out a

physical weakness.

If you’re like most people, you have no clue how other people see things

and aren’t good at seeking to understand what they are thinking, because

you’re too preoccupied with telling them what you yourself think is correct.

In other words, you are closed-minded; you presume too much. This closed-

mindedness is terribly costly; it causes you to miss out on all sorts of

wonderful possibilities and dangerous threats that other people might be

showing you—and it blocks criticism that could be constructive and even

lifesaving.

The end result of these two barriers is that parties in disagreements

typically remain convinced that they’re right—and often end up angry at each

other. This is illogical and leads to suboptimal decision making. After all,

when two people reach opposite conclusions, someone must be wrong.

Shouldn’t you want to make sure that someone isn’t you?

This failure to benefit from others’ thinking doesn’t just occur when

disagreements arise; it occurs when people encounter problems that they are

trying to solve. When trying to figure things out, most people spin in their

own heads instead of taking in all the wonderful thinking available to them.

As a result, they continually run toward what they see and keep crashing into

what they are blind to until the crashing leads them to adapt. Those who

adapt do so by a) teaching their brains to work in a way that doesn’t come

naturally (the creative person learns to become organized through discipline

and practice, for instance), b) using compensating mechanisms (such as

programmed reminders), and/or c) relying on the help of others who are

strong where they are weak.

Differences in thinking can be symbiotic and complementary instead of

disruptive. For example, the lateral approach to thinking common among

creative people can lead them to be unreliable, while more linear thinkers are

often more dependable; some people are more emotional while others are

more logical, and so on. None of these individuals would be able to succeed

at any kind of complex project without the help of others who have

complementary strengths.

Aristotle defined tragedy as a terrible outcome arising from a person’s

fatal flaw—a flaw that, had it been fixed, instead would have led to a

wonderful outcome. In my opinion, these two barriers—ego and blind spots

—are the fatal flaws that keep intelligent, hardworking people from living up

to their potential.

Would you like to learn how to get past them? You can do it; everybody

can. Here’s how.

3.2 Practice radical open-mindedness.

If you know that you are blind, you can figure out a way to see, whereas if

you don’t know that you’re blind, you will continue to bump into your

problems. In other words, if you can recognize that you have blind spots and

open-mindedly consider the possibility that others might see something better

than you—and that the threats and opportunities they are trying to point out

really exist—you are more likely to make good decisions.

Radical open-mindedness is motivated by the genuine worry that you

might not be seeing your choices optimally. It is the ability to effectively

explore different points of view and different possibilities without letting

your ego or your blind spots get in your way. It requires you to replace your

attachment to always being right with the joy of learning what’s true. Radical

open-mindedness allows you to escape from the control of your lower-level

you and ensures your upper-level you sees and considers all the good choices

and makes the best possible decisions. If you can acquire this ability—and

with practice you can—you’ll be able to deal with your realities more

effectively and radically improve your life.

Most people don’t understand what it means to be radically open-minded.

They describe open-mindedness as being “open to being wrong,” but

stubbornly cling to whatever opinion is in their head and fail to seek an

understanding of the reasoning behind alternative points of view. To be

radically open-minded you must:

a. Sincerely believe that you might not know the best possible path and recognize that

your ability to deal well with “not knowing” is more important than whatever it is you

do know. Most people make bad decisions because they are so certain that

they’re right that they don’t allow themselves to see the better alternatives

that exist. Radically open-minded people know that coming up with the right

questions and asking other smart people what they think is as important as

having all the answers. They understand that you can’t make a great decision

without swimming for a while in a state of “not knowing.” That is because

what exists within the area of “not knowing” is so much greater and more

exciting than anything any one of us knows.

b. Recognize that decision making is a two-step process: First take in all the relevant

information, then decide. Most people are reluctant to take in information that is

inconsistent with what they have already concluded. When I ask why, a

common answer is: “I want to make up my own mind.” These people seem to

think that considering opposing views will somehow threaten their ability to

decide what they want to do. Nothing could be further from the truth. Taking

in others’ perspectives in order to consider them in no way reduces your

freedom to think independently and make your own decisions. It will just

broaden your perspective as you make them.

c. Don’t worry about looking good; worry about achieving your goal.

People typically try to prove that they have the answer even when they don’t.

Why do they behave in this unproductive way? It’s generally because they

believe the senseless but common view that great people have all the answers

and don’t have any weaknesses. Not only does this view not square with

reality, it stands in the way of their progress. People interested in making the

best possible decisions are rarely confident that they have the best answers.

They recognize that they have weaknesses and blind spots, and they always

seek to learn more so that they can get around them.

d. Realize that you can’t put out without taking in. Most people seem much more

eager to put out (convey their thinking and be productive) than to take in

(learn). That’s a mistake even if one’s primary goal is to put out, because

what one puts out won’t be good unless one takes in as well.

e. Recognize that to gain the perspective that comes from seeing things through

another’s eyes, you must suspend judgment for a time—only by empathizing can you

properly evaluate another point of view. Open-mindedness doesn’t mean going

along with what you don’t believe in; it means considering the reasoning of

others instead of stubbornly and illogically holding on to your own point of

view. To be radically open-minded, you need to be so open to the possibility

that you could be wrong that you encourage others to tell you so.

f. Remember that you’re looking for the best answer, not simply the best answer that

you can come up with yourself. The answer doesn’t have to be in your head; you

can look outside yourself. If you’re truly looking at things objectively, you

must recognize that the probability of you always having the best answer is

small and that, even if you have it, you can’t be confident that you do before

others test you. So it is invaluable to know what you don’t know. Ask

yourself: Am I seeing this just through my own eyes? If so, then you should

know that you’re terribly handicapped.

g. Be clear on whether you are arguing or seeking to understand, and think about

which is most appropriate based on your and others’ believability. If both parties

are peers, it’s appropriate to argue. But if one person is clearly more

knowledgeable than the other, it is preferable for the less knowledgeable

person to approach the more knowledgeable one as a student and for the more

knowledgeable one to act as a teacher. Doing this well requires you to

understand the concept of believability. I define believable people as those

who have repeatedly and successfully accomplished the thing in question—

who have a strong track record with at least three successes—and have great

explanations of their approach when probed.

If you have a different view than someone who is believable on the topic

at hand—or at least more believable than you are (if, say, you are in a

discussion with your doctor about your health)—you should make it clear

that you are asking questions because you are seeking to understand their

perspective. Conversely, if you are clearly the more believable person, you

might politely remind the other of that and suggest that they ask you

questions.

All these strategies come together in two practices that, if you seek to become

radically open-minded, you must master.

3.3 Appreciate the art of thoughtful disagreement.

When two people believe opposite things, chances are that one of them is

wrong. It pays to find out if that someone is you. That’s why I believe you

must appreciate and develop the art of thoughtful disagreement. In thoughtful

disagreement, your goal is not to convince the other party that you are right—

it is to find out which view is true and decide what to do about it. In

thoughtful disagreement, both parties are motivated by the genuine fear of

missing important perspectives. Exchanges in which you really see what the

other person is seeing and they really see what you are seeing—with both

your “higher-level yous” trying to get to the truth—are immensely helpful

and a giant source of untapped potential.

To do this well, approach the conversation in a way that conveys that

you’re just trying to understand.

Use questions rather than make statements.

Conduct the discussion in a calm and dispassionate manner, and encourage

the other person to do that as well. Remember, you are not arguing; you are

openly exploring what’s true. Be reasonable and expect others to be

reasonable. If you’re calm, collegial, and respectful you will do a lot better

than if you are not. You’ll get better at this with practice.

To me, it’s pointless when people get angry with each other when they

disagree because most disagreements aren’t threats as much as opportunities

for learning. People who change their minds because they learned something

are the winners, whereas those who stubbornly refuse to learn are the losers.

That doesn’t mean that you should blindly accept others’ conclusions. You

should be what I call open-minded and assertive at the same time—you

should hold and explore conflicting possibilities in your mind while moving

fluidly toward whatever is likely to be true based on what you learn. Some

people can do this easily while others can’t. A good exercise to make sure

that you are doing this well is to describe back to the person you are

disagreeing with their own perspective. If they agree that you’ve got it, then

you’re in good shape. I also recommend that both parties observe a “two-

minute rule” in which neither interrupts the other, so they both have time to

get all their thoughts out.

Some people worry that operating this way is time consuming. Working

through disagreements does take time but it’s just about the best way you can

spend it. What’s important is that you prioritize what you spend time on and

who you spend it with. There are lots of people who will disagree with you,

and it would be unproductive to consider all their views. It doesn’t pay to be

open-minded with everyone. Instead, spend your time exploring ideas with

the most believable people you have access to.

If you find you’re at an impasse, agree on a person you both respect and

enlist them to help moderate the discussion. What’s really counterproductive

is spinning in your own head about what’s going on, which most people are

prone to do—or wasting time disagreeing past the point of diminishing

returns. When that happens, move on to a more productive way of getting to

a mutual understanding, which isn’t necessarily the same thing as agreement.

For example, you might agree to disagree.

Why doesn’t thoughtful disagreement like this typically occur? Because

most people are instinctively reluctant to disagree. For example, if two people

go to a restaurant and one says he likes the food, the other is more likely to

say “I like it too” or not say anything at all, even if that’s not true. The

reluctance to disagree is the “lower-level you’s” mistaken interpretation of

disagreement as conflict. That’s why radical open-mindedness isn’t easy:

You need to teach yourself the art of having exchanges in ways that don’t

trigger such reactions in yourself or others. This was what I had to learn back

when Bob, Giselle, and Dan told me I made people feel belittled.

Holding wrong opinions in one’s head and making bad decisions based on

them instead of having thoughtful disagreements is one of the greatest

tragedies of mankind. Being able to thoughtfully disagree would so easily

lead to radically improved decision making in all areas—public policy,

politics, medicine, science, philanthropy, personal relationships, and more.

3.4 Triangulate your view with believable people

who are willing to disagree.

By questioning experts individually and encouraging them to have thoughtful

disagreement with each other that I can listen to and ask questions about, I

both raise my probability of being right and become much better educated.

This is most true when the experts disagree with me or with each other. Smart

people who can thoughtfully disagree are the greatest teachers, far better than

a professor assigned to stand in front of a board and lecture at you. The

knowledge I acquire usually leads to principles that I develop and refine for

similar cases that arise in the future.

In some cases in which the subjects are just too complex for me to

understand in the time required, I will turn over the decision making to

knowledgeable others who are more believable than me, but I still want to

listen in on their thoughtful disagreement. I find that most people don’t do

that—they prefer to make their own decisions, even when they’re not

qualified to make the kinds of judgments required. In doing so, they’re giving

in to their lower-level selves.

This approach of triangulating the views of believable people can have a

profound effect on your life. I know it has made the difference between life

and death for me. In June 2013, I went to Johns Hopkins for an annual

physical, where I was told that I had a precancerous condition called Barrett’s

esophagus with high-grade dysplasia. Dysplasia is an early stage in the

development of cancer, and the probability that it will turn into esophageal

cancer is relatively high—about 15 percent of cases per year. Cancer of the

esophagus is deadly, so if left untreated, the odds were that in something like

three to five years I’d develop cancer and die. The standard protocol for cases

like mine is to remove the esophagus, but I wasn’t a candidate for that

because of something specific to my condition. The doctor advised that I wait

and see how things progressed.

In the weeks that followed, I started to plan for my eventual death, while

also fighting to live. I like to:

a. Plan for the worst-case scenario to make it as good as possible. I felt fortunate

because this prognosis gave me enough time to ensure that the people I cared

most about would be okay without me, and to savor life with them in the

years I had left. I would have time to get to know my first grandson, who had

just been born, but not so much time that I could take it for granted.

But as you know by now, rather than following what I am told is best,

even by an expert, I like to triangulate opinions with believable people. So I

also had my personal physician, Dr. Glazer, set up visits with four other

experts on this particular disease.

The first call was with the head of thoracic surgery at a major cancer

hospital. She explained that my condition had advanced quickly and that,

contrary to what the first physician said, there was a surgery that could cure

me. It would involve removing both my esophagus and my stomach and

attaching my intestines to the remaining little bit of my esophagus I’d have

left. She estimated I’d have a 10 percent chance of dying on the operating

table and a 70 percent chance of a crippling outcome. But the odds were in

favor of my living, so her recommendation was clearly worth taking

seriously. Naturally I wanted her to speak with the doctor from Johns

Hopkins who originally diagnosed me and recommended a watch-and-wait

approach, so right then and there I called the other doctor to see what each

would say about the other’s views. This was eye-opening. While the two

doctors had told me completely different things when I met with them in

person, when they were on the phone together, they sought to minimize their

disagreement and make the other look good, putting professional courtesy

ahead of thrashing things out to get at the best answer. Still, the differences in

their views were clear, and listening to them deepened my understanding.

The next day I met with a third doctor who was a world-renowned

specialist and researcher at another esteemed hospital. He told me that my

condition would basically cause me no problems so long as I came in for an

endoscopic examination every three months. He explained that it was like

skin cancer but on the inside—if it was watched and any new growth was

clipped before it metastasized into the bloodstream, I’d be okay. According to

him, the results for patients monitored in this way were no different than for

those who had their esophagus removed. To put that plainly: They didn’t die

from cancer. Life went on as normal for them except for those occasional

examinations and procedures.

To recap: Over the course of forty-eight hours, I had gone from a likely

death sentence to a likely cure that would essentially involve disemboweling

me, and then finally to a simple, and only slightly inconvenient, way of

watching for abnormalities and removing them before they could cause any

harm. Was this doctor wrong?

Dr. Glazer and I went on to meet two other world-class specialists and

they both agreed that undergoing the scoping procedure would do no harm,

so I decided to go ahead with it. During the procedure, they clipped some

tissue from my esophagus and sent it to the laboratory for testing. A few days

after the procedure, exactly a week before my sixty-fourth birthday, I got the

results. They were shocking to say the least. After analyzing the tissue, it

turned out there wasn’t any high-grade dysplasia at all!

Even experts can make mistakes; my point is simply that it pays to be

radically open-minded and triangulate with smart people. Had I not pushed

for other opinions, my life would have taken a very different course. My

point is that you can significantly raise your probabilities of making the right

decisions by open-mindedly triangulating with believable people.

3.5 Recognize the signs of closed-mindedness and

open-mindedness that you should watch out for.

It’s easy to tell an open-minded person from a closed-minded person because

they act very differently. Here are some cues to tell you whether you or

others are being closed-minded:

1. Closed-minded people don’t want their ideas challenged. They are

typically frustrated that they can’t get the other person to agree with

them instead of curious as to why the other person disagrees. They feel

bad about getting something wrong and are more interested in being

proven right than in asking questions and learning others’ perspectives.

Open-minded people are more curious about why there is disagreement.

They are not angry when someone disagrees. They understand that

there is always the possibility that they might be wrong and that it’s

worth the little bit of time it takes to consider the other person’s views

in order to be sure they aren’t missing something or making a mistake.

2. Closed-minded people are more likely to make statements than ask

questions. While believability entitles you to make statements in certain

circumstances, truly open-minded people, even the most believable

people I know, always ask a lot of questions. Nonbelievable people

often tell me that their statements are actually implicit questions, though

they’re phrased as low-confidence statements. While that’s sometimes

true, in my experience it’s more often not.

Open-minded people genuinely believe they could be wrong; the

questions that they ask are genuine. They also assess their relative

believability to determine whether their primary role should be as a

student, a teacher, or a peer.

3. Closed-minded people focus much more on being understood than on

understanding others. When people disagree, they tend to be quicker to

assume that they aren’t being understood than to consider whether

they’re the ones who are not understanding the other person’s

perspective.

Open-minded people always feel compelled to see things through others’

eyes.

4. Closed-minded people say things like “I could be wrong . . . but here’s my

opinion.” This is a classic cue I hear all the time. It’s often a

perfunctory gesture that allows people to hold their own opinion while

convincing themselves that they are being open-minded. If your

statement starts with “I could be wrong” or “I’m not believable,” you

should probably follow it with a question and not an assertion.

Open-minded people know when to make statements and when to ask

questions.

5. Closed-minded people block others from speaking. If it seems like

someone isn’t leaving space for the other person in a conversation, it’s

possible they are blocking. To get around blocking, enforce the “two-

minute rule” I mentioned earlier.

Open-minded people are always more interested in listening than in

speaking; they encourage others to voice their views.

6. Closed-minded people have trouble holding two thoughts simultaneously

in their minds. They allow their own view to crowd out those of others.

Open-minded people can take in the thoughts of others without losing

their ability to think well—they can hold two or more conflicting

concepts in their mind and go back and forth between them to assess

their relative merits.

7. Closed-minded people lack a deep sense of humility. Humility typically

comes from an experience of crashing, which leads to an enlightened

focus on knowing what one doesn’t know.

Open-minded people approach everything with a deep-seated fear that

they may be wrong.

Once you can sort out open-minded from closed-minded people, you’ll find

that you want to surround yourself with open-minded ones. Doing so will not

only make your decision making more effective but you’ll also learn a

tremendous amount. A few good decision makers working effectively

together can significantly outperform a good decision maker working alone—

and even the best decision maker can significantly improve his or her

decision making with the help of other excellent decision makers.

3.6 Understand how you can become radically open-

minded.

No matter how open-minded you are now, it is something you can learn. To

practice open-mindedness:

a. Regularly use pain as your guide toward quality reflection. Mental pain often

comes from being too attached to an idea when a person or an event comes

along to challenge it. This is especially true when what is being pointed out to

you involves a weakness on your part. This kind of mental pain is a clue that

you are potentially wrong and that you need to think about the question in a

quality way. To do this, first calm yourself down. This can be difficult: You

will probably feel your amygdala kicking in through a tightening in your

head, tension in your body, or an emerging sense of annoyance, anger, or

irritability. Note these feelings when they arise in you. By being aware of

such signals of closed-mindedness, you can use them as cues to control your

behavior and guide yourself toward open-mindedness. Doing this regularly

will strengthen your ability to keep your “higher-level you” in control. The

more you do it, the stronger you will become.

b. Make being open-minded a habit. The life that you will live is most simply the

result of habits you develop. If you consistently use feelings of

anger/frustration as cues to calm down, slow down, and approach the subject

at hand thoughtfully, over time you’ll experience negative emotions much

less frequently and go directly to the open-minded practices I just described.

Of course, this can be very hard for people to do in the moment because

your “lower-level you” emotions are so powerful. The good news is that

these “amygdala hijackings”

don’t last long so even if you’re having trouble

controlling yourself in the moment, you can also allow a little time to pass to

give your higher-level you space to reflect in a quality way. Have others

whom you respect help you too.

c. Get to know your blind spots. When you are closed-minded and form an

opinion in an area where you have a blind spot, it can be deadly. So take

some time to record the circumstances in which you’ve consistently made

bad decisions because you failed to see what others saw. Ask others—

especially those who’ve seen what you’ve missed—to help you with this.

Write a list, tack it up on the wall, and stare at it. If ever you find yourself

about to make a decision (especially a big decision) in one of these areas

without consulting others, understand that you’re taking a big risk and that it

would be illogical to expect that you’ll get the results you think you will.

d. If a number of different believable people say you are doing something wrong and

you are the only one who doesn’t see it that way, assume that you are probably biased.

Be objective! While it is possible that you are right and they are wrong, you

should switch from a fighting mode to an “asking questions” mode, compare

your believability with theirs, and if necessary agree to bring in a neutral

party you all respect to break the deadlock.

e. Meditate. I practice Transcendental Meditation and believe that it has

enhanced my open-mindedness, higher-level perspective, equanimity, and

creativity. It helps slow things down so that I can act calmly even in the face

of chaos, just like a ninja in a street fight. I’m not saying that you have to

meditate in order to develop this perspective; I’m just passing along that it

has helped me and many other people and I recommend that you seriously

consider exploring it.

f. Be evidence-based and encourage others to be the same. Most people do not look

thoughtfully at the facts and draw their conclusions by objectively weighing

the evidence. Instead, they make their decisions based on what their deep-

seated subconscious mind wants and then they filter the evidence to make it

consistent with those desires. It is possible to become aware of this

subconscious process happening and to catch yourself, or to allow others to

catch you going down this path. When you’re approaching a decision, ask

yourself: Can you point to clear facts (i.e., facts believable people wouldn’t

dispute) leading to your view? If not, chances are you’re not being evidence-

based.

g. Do everything in your power to help others also be open-minded.

Being calm and reasonable in how you present your view will help prevent

the “flight-or-fight” animal/amygdala reaction in others. Be reasonable and

expect others to be reasonable. Ask them to point to the evidence that

supports their point of view. Remember, it is not an argument; it is an open

exploration of what’s true. Demonstrating that you are taking in what they are

telling you can be helpful.

h. Use evidence-based decision-making tools. These principles were designed to

help you get control over your lower-level/animal you and put your better,

higher-level decision-making brain in charge.

What if you could unplug that lower part of your brain entirely and instead

connect with a decision-making computer that gives you logically derived

instructions, as we do with our investment systems? Suppose this computer-

based decision-making machine has a much better track record than you

because it captures more logic, processes more information more quickly,

and makes decisions without being emotionally hijacked. Would you use it?

In confronting the challenges I’ve faced in the course of my career I’ve

created exactly such tools, and I am convinced that I would not have been

nearly as successful without them. I have no doubt that in the years ahead

such “machine-thinking” tools will continue to develop and that smart

decision makers will learn how to integrate them into their thinking. I urge

you to learn about them and consider using them.

i. Know when it’s best to stop fighting and have faith in your decision-making

process. It’s important that you think independently and fight for what you

believe in, but there comes a time when it’s wiser to stop fighting for your

view and move on to accepting what believable others think is best. This can

be extremely difficult. But it’s smarter and ultimately better for you to be

open-minded and have faith that the consensus of believable others is better

than whatever you think. If you can’t understand their view, you’re probably

just blind to their way of thinking. If you continue doing what you think is

best when all the evidence and believable people are against you, you’re

being dangerously arrogant.

The truth is that while most people can become radically open-minded, some

can’t, even after they have repeatedly encountered lots of pain from betting

that they were right when they were not.

People who don’t learn radical

open-mindedness don’t experience the metamorphosis that allows them to do

much better. I myself had to have that humility beaten into me by my crashes,

especially my big one in 1982. Gaining open-mindedness doesn’t mean

losing assertiveness. In fact, because it increases one’s odds of being right, it

should increase one’s confidence. That has been true for me since my big

crash, which is why I’ve been able to have more success with less risk.

Becoming truly open-minded takes time. Like all real learning, doing this

is largely a matter of habit; once you do it so many times it is almost

instinctive, you’ll find it intolerable to be any other way. As noted earlier,

this typically takes about eighteen months, which in the course of a lifetime is

nothing.

ARE YOU UP FOR THE CHALLENGE?

For me, there is really only one big choice to make in life: Are you willing to

fight to find out what’s true? Do you deeply believe that finding out what is

true is essential to your well-being? Do you have a genuine need to find out if

you or others are doing something wrong that is standing in the way of

achieving your goals? If your answer to any of these questions is no, accept

that you will never live up to your potential. If, on the other hand, you are up

for the challenge of becoming radically open-minded, the first step in doing

so is to look at yourself objectively. In the next chapter, Understand That

People Are Wired Very Differently, you’ll have a chance to do just that.

25 The brain is a highly interconnected organ with many different structures responsible

for producing our thoughts, feelings, and actions. When explaining these things, I’ve

adopted some conventions, such as describing the amygdala as the sole cause of emotional

flight-or-fight reactions, even though the exact neuroanatomy is more complex. I’ll cover

this in more detail in the following chapter.

26 One way to do this is by asking questions like “Would you rather I be open with my

thoughts and questions or keep them to myself?”; “Are we going to try to convince each

other that we are right or are we going to open-mindedly hear each other’s perspectives to

try to figure out what’s true and what to do about it?”; or “Are you arguing with me or

seeking to understand my perspective?”

27 Psychologist and science journalist Daniel Goleman originally coined this term in

Emotional Intelligence.

28 Some of this may be a result of what is called the Dunning-Kruger effect, a cognitive

bias in which low-ability individuals believe that they are in fact superior.

4 Understand That People Are

Wired Very Differently

Because of the different ways that our brains are wired, we all experience

reality in different ways and any single way is essentially distorted. This is

something that we need to acknowledge and deal with. So if you want to

know what is true and what to do about it, you must understand your own

brain.

That insight led me to talk with many psychologists, psychiatrists,

neuroscientists, personality testers, and other believable people in the field,

and it led me to read many books. I discovered that though it is obvious to all

of us that we are born with different strengths and weaknesses in areas such

as common sense, creativity, memory, synthesis, attention to detail, and so

forth, examining these differences objectively makes even most scientists

uncomfortable. But that doesn’t make it any less necessary, so I pushed

forward with these explorations over several decades.

As a result, I have learned a lot that helped me and that I believe can help

you. In fact, I attribute as much of my success to what I’ve learned about the

brain as I do to my understanding of economics and investing. In this chapter,

I will share some of the amazing things I’ve learned.

WHY I TURNED TO NEUROSCIENCE

When I started Bridgewater two years out of business school, I had to

manage people for the first time. At first I thought that hiring smart people—

for instance, the top students out of the top schools—should get me capable

employees, but as often as not, those people didn’t turn out well. “Book

smarts” didn’t typically equate to the type of smarts I needed.

I wanted to work with independent thinkers who were creative,

conceptual, and had a lot of common sense. But I had a hard time finding

those sorts of people and even when I did, I was shocked at how differently

their brains seemed to work. It was as though we were speaking different

languages. For example, those who were “conceptual” and imprecise spoke

one language while those who were literal and precise spoke another. At the

time, we chalked this up to “communication problems,” but the differences

were much deeper than that—and they were painful for all of us, particularly

when we were trying to achieve big things together.

I remember one research project—an ambitious attempt to systemize our

global understanding of the bond markets—that took place years ago. Bob

Prince was running it, and while we agreed conceptually on what we were

trying to do, the project didn’t get pushed through to results. We’d meet with

Bob and his team to agree on the goal and lay out how to get there. But when

they’d go off to work on it, they’d make no progress. The problem was that

conceptual people who visualized what should be done in vague ways

expected more literal people to figure out for themselves how to do it. When

they didn’t, the more conceptual people thought the more literal people had

no imagination, and the more literal people thought the more conceptual

people had their heads in the clouds. To make matters worse, none of them

knew which were which—the more literal people thought that they were as

conceptual as the conceptual people and vice versa. In short, we were

gridlocked, and everyone thought it was someone else’s fault—that the

people they were locking horns with were blind, stubborn, or just plain

stupid.

Those meetings were painful for everyone. Because no one was clear

about what they were good or bad at, everybody expressed opinions about

everything and there wasn’t any sensible way of sorting through them. We

discussed why the group was failing, which led us to see that the individuals

Bob had chosen for his team reflected his own strengths and weaknesses in

their own roles. While that took frankness and open-mindedness and was a

big step forward, it wasn’t recorded and systematically converted into

adequate changes, so the same people kept making the same sort of mistakes,

over and over again.

Isn’t it obvious that our different ways of thinking, our emotional

responses, and our not having ways of dealing with them is crippling us?

What are we supposed to do, not deal with them?

I’m sure you’ve been in contentious disagreements before—ones where

people have different points of view and can’t agree on what’s right. Good

people with good intentions get angry and emotional; it is frustrating and

often becomes personal. Most companies avoid this by suppressing open

debate and having those with the most authority simply make the calls. I

didn’t want that kind of company. I knew we needed to dig more deeply into

what was preventing us from working together more effectively, bring those

things to the surface, and explore them.

Bridgewater’s roughly 1,500 employees do many different things—some

strive to understand the global markets; others develop technologies; still

others serve clients, manage health insurance and other benefits for

employees, provide legal guidance, manage IT and facilities, and so on. All

these activities require different types of people to work together in ways that

harvest the best ideas and throw away the worst. Organizing people to

complement their strengths and compensate for their weaknesses is like

conducting an orchestra. It can be magnificent if done well and terrible if

done poorly.

While “know thyself” and “to thine own self be true” are fundamental

tenets I had heard long before I began looking into the brain, I had no idea

how to go about getting that knowledge or how to act on it until we made

these discoveries about how people think differently. The better we know

ourselves, the better we can recognize both what can be changed and how to

change it, and what can’t be changed and what we can do about that. So no

matter what you set out to do—whether on your own, as a member of an

organization, or as its director—you need to understand how you and other

people are wired.

4.1 Understand the power that comes from knowing

how you and others are wired.

As I related in the first part of this book, my first breakthrough in

understanding how people think differently occurred when I was a young

father and had my kids tested by Dr. Sue Quinlan. I found the results

remarkable, because she not only confirmed my own observations of the

ways that their minds were working at the time but also predicted how they

would develop in the future. For example, one of my kids was struggling with

arithmetic. Because he tested well in mathematical reasoning, she correctly

told him that if he pushed through the boredom of rote memorization required

in elementary school, he would love the higher-level concepts he would be

exposed to when he got older. These insights opened my eyes to new

possibilities. I turned to her and others years later when I was trying to figure

out the different thinking styles of my employees and colleagues.

At first, the experts gave me both bad and good advice. Many seemed as if

they were more interested in making people feel good (or not feel bad) than

they were at getting at the truth. Even more startling, I found that most

psychologists didn’t know much about neuroscience and most neuroscientists

didn’t know much about psychology—and both were reluctant to connect the

physiological differences in people’s brains to the differences in their

aptitudes and behaviors. But eventually I found Dr. Bob Eichinger, who

opened the world of psychometric testing to me. Using Myers-Briggs and

other assessments, we evolved a much clearer and more data-driven way of

understanding our different types of thinking.

Our differences weren’t a product of poor communication; it was the other

way around. Our different ways of thinking led to our poor communications.

From conversations with experts and my own observations, I learned that

many of our mental differences are physiological. Just as our physical

attributes determine the limits of what we are able to do physically—some

people are tall and others are short, some muscular and others weak—our

brains are innately different in ways that set the parameters of what we are

able to do mentally. As with our bodies, some parts of our brains cannot be

materially affected by external experience (in the same way that your

skeleton isn’t changed much through working out), while other parts can be

strengthened through exercise (I will have more to say about brain plasticity

later in this chapter).

This was driven home to me by my son Paul’s three-year struggle with

bipolar disorder. As terrifying and frustrating as his behavior was, I came to

realize that it was due to his brain’s chemistry (specifically, its secreting

serotonin and dopamine in spurts and sputters). As I went through that

terrible journey with him, I experienced the frustration and anger of trying to

reason with someone who wasn’t thinking well. I constantly had to remind

myself that there was no basis for my anger because his distorted logic was a

product of his physiology—and I saw for myself how the doctors who

approached it that way brought him to a state of crystal clarity. The

experience not only taught me a lot about how brains work but why creative

genius often exists at the edge of insanity. Many highly productive and

creative people have suffered from bipolar disorder, among them Ernest

Hemingway, Beethoven, Tchaikovsky, Vincent van Gogh, Jackson Pollock,

Virginia Woolf, Winston Churchill, and the psychologist Kay Redfield

Jamison (who has written frankly about her own experiences with the disease

in her book An Unquiet Mind). I learned that we are all different because of

the different ways that the machine that is our brain works—and that nearly

one in five Americans are clinically mentally ill in one way or another.

Once I understood that it’s all physiological, many things became clearer

to me. While I used to get angry and frustrated at people because of the

choices they made, I came to realize that they weren’t intentionally acting in

a way that seemed counterproductive; they were just living out things as they

saw them, based on how their brains worked. I also realized that as off-base

as they seemed to me, they saw me the same way. The only sensible way of

behaving with each other was to look down upon ourselves with mutual

understanding so we could make objective sense of things. Not only did this

make our disagreements less frustrating, it also allowed us to maximize our

effectiveness.

Everyone is like a Lego set of attributes, with each piece reflecting the

workings of a different part of their brain. All these pieces come together to

determine what each person is like, and if you know what a person is like,

you’ll have a pretty good idea of what you can expect from them.

a. We are born with attributes that can both help us and hurt us, depending on their

application. Most attributes are a double-edged sword that bring potential

benefits and potential harm. The more extreme the attribute, the more

extreme the potential good or bad outcomes it is likely to produce. For

example, a highly creative, goal-oriented person good at imagining new ideas

might undervalue the minutiae of daily life, which is also important; he might

be so driven in his pursuit of long-term goals that he might have disdain for

people who focus on the details of daily life. Similarly, a task-oriented person

who is great with details might undervalue creativity—and worse still, may

squelch it in the interests of efficiency. These two people might make a great

team, but are likely to have trouble taking advantage of the ways they’re

complementary, because the ways their minds work make it difficult for them

to see the value of each other’s ways of thinking.

Having expectations for people (including yourself) without knowing what

they are like is a sure way to get in trouble. I learned this the hard way,

through years of frustrating conversations and the pain of expecting things

from people who were constitutionally incapable of delivering them. I’m sure

that I caused them plenty of pain too. Over time, I realized that I needed a

systematic approach to capturing and recording our differences so that we

could actively take them into consideration when putting people into different

roles at Bridgewater.

This led to one of my most valuable management tools: Baseball Cards,

which I mentioned in the first part of this book. Just as a baseball card

compiles the relevant data on a baseball player, helping fans know what that

player is good and bad at, I decided that it would be similarly helpful for us to

have cards for all of our players at Bridgewater.

In creating the attributes for our baseball cards, I used a combination of

adjectives we already used to describe people, like “conceptual,” “reliable,”

“creative,” and “determined”; the actions people took or didn’t take such as

“holding others accountable” and “pushing through to results”; and terms

from personality tests such as “extroverted” or “judging.” Once the cards

were established, I created a process to have people evaluate each other, with

the people rated highest in each dimension (e.g., “most creative”) having

more weight on the ratings of other people in that dimension. People with

proven track records in a certain area would get more believability, or

decision-making weight, within that area. By recording these qualities in

people’s Baseball Cards, others who’d never worked with them before could

know what to expect from them. When people changed, their rating would

change. And when they didn’t change, we were even more sure of what we

could expect of them.

Naturally when I introduced this tool, people were skeptical or scared of it

for various reasons. Some were afraid that the cards would be inaccurate;

others thought it would be uncomfortable to have their weaknesses made so

apparent, or that it would lead to their being pigeonholed, inhibiting their

growth; still others thought it would be too complex to be practical. Imagine

how you would feel if you were asked to force-rank all your colleagues on

creativity, determination, or reliability. Most people at first find that prospect

frightening.

Still, I knew that we needed to be radically open in recording and

considering what people were like, and that things would eventually evolve

to address people’s concerns if we were sensible about how we approached

the process. Today, most everyone at Bridgewater finds these Baseball Cards

to be essential, and we have built a whole suite of other tools, which will be

further described in Work Principles, to support our drive to understand what

people are like and who is believable at what.

I’ve already noted that our unique way of operating and the treasure trove

of data we accumulated brought us to the attention of some world-renowned

organizational psychologists and researchers. Bob Kegan of Harvard

University, Adam Grant of the Wharton School, and Ed Hess of the

University of Virginia have written about us extensively, and I have learned a

great deal from them in turn. In a way I never intended, our trial-and-error

discovery process has put us at the cutting edge of academic thinking about

personal development within organizations. As Kegan wrote in his book An

Everyone Culture, “from the individual experience of probing in every one-

on-one meeting, to the technologically integrated processes for discussing . . .

issues and baseball cards, to the company-wide practices of daily updates and

cases, Bridgewater has built an ecosystem to support personal development.

The system helps everyone in the company confront the truth about what

everyone is like.”

Our journey of discovery has coincided with an incredibly fertile epoch in

neuroscience, when, thanks to rapid advances in brain imaging and the ability

to gather and process big data, our understanding has accelerated

dramatically. As with all sciences on the cusp of breakthroughs, I am sure

that much of what is thought to be true today will soon be radically improved.

But what I do know is how incredibly beautiful and useful it is to understand

how the thinking machine between our ears works.

Here’s some of what I’ve learned:

The brain is even more complex than we can imagine. It has an estimated

eighty-nine billion tiny computers (called neurons) that are connected to each

other through many trillions of “wires” called axons and chemical synapses.

As David Eagleman describes it in his wonderful book Incognito:

Your brain is built of cells called neurons and glia—hundreds of billions

of them. Each one of them is as complex as a city. . . . The cells [neurons]

are connected in a network of such staggering complexity that it

bankrupts human language and necessitates new strains of mathematics.

A typical neuron makes about ten thousand connections to neighboring

neurons. Given billions of neurons, this means that there are as many

connections in a single cubic centimeter of brain tissue as there are stars

in the Milky Way galaxy.

When we are born our brains are preprogrammed with learning

accumulated over hundreds of millions of years. For example, researchers at

the University of Virginia have shown that while many people have an

instinctual fear of snakes, no one has an instinctual fear of flowers. The

brains that we were born with had learned that snakes are dangerous and

flowers are not. There’s a reason for that.

There is one grand design for the brains of all mammals, fish, birds,

amphibians, and reptiles, which was established nearly 300 million years ago

and has been evolving ever since. Just as cars have evolved into different

versions—sedans, SUVs, sports cars, etc.—that rely on many of the same

underlying parts, all vertebrate brains have similar parts that do similar things

but that are well adapted to the needs of their own particular species. For

example, birds have superior occipital lobes because they need to spot prey

(and predators) from great heights. While we humans think of ourselves as

superior overall because we overemphasize the importance of our own

advantages, other species could justifiably make the same claims on their

own behalf—birds for flight, eyesight, and instinctual magnetic navigation;

most animals for smell; and several for appearing to have particularly

enjoyable sex.

This “universal brain” has evolved from the bottom up, meaning that its

lower parts are evolutionarily the oldest and the top parts are the newest. The

brainstem controls the subconscious processes that keep us and other species

alive—heartbeat, breathing, nervous system, and our degree of arousal and

alertness. The next layer up, the cerebellum, gives us the ability to control our

limb movements by coordinating sensory input with our muscles. Then

comes the cerebrum, which includes the basal ganglia (which controls habit)

and other parts of the limbic system (which controls emotional responses and

some movement) and the cerebral cortex (which is where our memories,

thoughts, and sense of consciousness reside). The newest and most advanced

part of the cortex, that wrinkled mass of gray matter that looks like a bunch

of intestines, is called the neocortex, which is where learning, planning,

imagination, and other higher-level thoughts come from. It accounts for a

significantly higher ratio of the brain’s gray matter than is found in the brains

of other species.

4.2 Meaningful work and meaningful relationships

aren’t just nice things we chose for ourselves—

they are genetically programmed into us.

Neuroscientists, psychologists, and evolutionists agree the human brain

comes pre-programmed with the need for and enjoyment of social

cooperation. Our brains want it and develop better when we have it. The

meaningful relationships we get from social cooperation make us happier,

healthier, and more productive; social cooperation is also integral to effective

work. It is one of the defining characteristics of being human.

Leonard Mlodinow, in his excellent book Subliminal, writes, “We usually

assume that what distinguishes us [from other species] is IQ. But it is our

social IQ that ought to be the principal quality that differentiates us.” He

points out that humans have a unique ability to understand what other people

are like and how they are likely to behave. The brain comes programmed to

develop this ability; by the time they are four years old, most children are

able to read others’ mental states. This sort of human understanding and

cooperation is what makes us so accomplished as a species. As Mlodinow

explains, “Building a car for example requires the participation of thousands

of people with diverse skills, in diverse lands, performing diverse tasks.

Metals like iron must be extracted from the ground and processed; glass,

rubber, and plastics must be created from numerous chemical precursors and

molded; batteries, radiators and countless other parts must be produced;

electronic and mechanical systems must be designed; and it all must come

together, coordinated from far and wide, in one factory so that the car can be

assembled. Today, even the coffee and bagel you might consume while

driving to work in the morning is the result of the activities of people all over

the world.”

In his book The Meaning of Human Existence, Pulitzer Prize–winning

author Edward O. Wilson surmises that between one million and two million

years ago, when our ancestors were somewhere between chimpanzees and

modern homo sapiens, the brain evolved in ways supporting cooperation so

man could hunt and do other activities. This led the centers of memory and

reasoning in the prefrontal cortex to develop beyond those of our primate

relatives. As groups became more powerful than individuals and our brains

evolved in ways that made larger groups manageable, competition between

groups became more important than competition between individuals and

groups that had more cooperative individuals did better than those without

them. This evolution led to the development of altruism, morality, and the

sense of conscience and honor. Wilson explains that man is perpetually

suspended between the two extreme forces that created us: “Individual

selection [which] prompted sin and group selection [which] promoted

virtue.”

Which of these forces (self-interest or collective interest) wins out in any

organization is a function of that organization’s culture, which is a function

of the people who shape it. But it’s clear that collective interest is what’s best,

not just for the organization but for the individuals who make it up. As I’ll

explain in Work Principles, the rewards of working together to make the pie

bigger are greater than the rewards of self-interest, not only in terms of how

much “pie” one gets but also in the psychic rewards wired into our brains that

make us happier and healthier.

Knowing how the brain has evolved thus far, we might extrapolate the

past into the future to imagine where it will go. Clearly the evolution of the

brain has moved from being nonthinking and self-focused toward being more

abstract and more universally focused. For example, the brain evolution that I

described has given us (some people more than others) the ability to see

ourselves and our circumstances from a higher holistic level and, in some

cases, to value the whole that we are part of even more than ourselves.

A few years ago, I had a conversation with the Dalai Lama in which I

explained to him the contemporary neuroscience view that all of our thinking

and feeling is due to physiology (in other words, the chemicals, electricity,

and biology in our brains working like a machine). This implied that

spirituality is due to these physiological mechanics rather than something

coming from above, so I asked him what he thought about that. Without

hesitation, he responded “Absolutely!” and told me that the next day he was

meeting with the University of Wisconsin professor of neuroscience who had

helped him learn about this, and he asked me if I wanted to join him.

Regrettably, I couldn’t but I recommended to him a book I’d read on the

subject called The Spiritual Brain (which I also recommend to you). In our

conversation, we went on to discuss the similarities and differences between

spirituality and religion. His view was that prayer and meditation seemed to

have similar effects on the brain in producing feelings of spirituality (the

rising above oneself to feel a greater connection to the whole) but that each

religion adds its own different superstitions on top of that common feeling of

spirituality. Rather than trying to squeeze my own summary of his thinking in

here, I’ll simply recommend the Dalai Lama’s book, Beyond Religion, if

you’re interested in learning more.

In imagining what the future of our thinking will be like, it’s also

interesting to consider how man himself might change how the brain works.

We are certainly doing that with drugs and technology. Given advances in

genetic engineering, it’s reasonable to expect that someday genetic engineers

might mix and match features of different species’ brains for different

purposes—if you want to have a heightened sense of sight, say, genetic

engineers might be able to manipulate the human brain so it grows optic

lobes more like those of birds. But since such things won’t happen anytime

soon, let’s get back to the practical question of how all this can help us better

deal with ourselves and each other.

4.3 Understand the great brain battles and how to

control them to get what “you” want.

The following sections explore the different ways your brain fights for

control of “you.” While I will refer to the specific parts of the brain that

neurophysiologists believe are responsible for specific types of thinking and

emotions, the actual physiology is much more complex—and scientists are

only beginning to understand it.

a. Realize that the conscious mind is in a battle with the subconscious mind. Earlier

in the book, I introduced the concept of the “two yous” and explained how

your higher-level you can look down on your lower-level you to make sure

that your lower-level you isn’t sabotaging what your higher-level you wants.

Though I’ve often seen these two yous in action in myself and others, it

wasn’t until I learned why they exist that I really understood them.

As with animals, many of our decision-making drivers are below the

surface. An animal doesn’t “decide” to fly or hunt or sleep or fight in the way

that we go about making many of our own choices of what to do—it simply

follows the instructions that come from the subconscious parts of its brain.

These same sorts of instructions come to us from the same parts of our brains,

sometimes for good evolutionary reasons and sometimes to our detriment.

Our subconscious fears and desires drive our motivations and actions through

emotions such as love, fear, and inspiration. It’s physiological. Love, for

example, is a cocktail of chemicals (such as oxytocin) secreted by the

pituitary gland.

While I had always assumed that logical conversation is the best way for

people to get at what is true, armed with this new knowledge about the brain,

I came to understand that there are large parts of our brains that don’t do what

is logical. For example, I learned that when people refer to their “feelings”—

such as saying “I feel that you were unfair with me”—they are typically

referring to messages that originate in the emotional, subconscious parts of

their brains. I also came to understand that while some subconscious parts of

our brains are dangerously animalistic, others are smarter and quicker than

our conscious minds. Our greatest moments of inspiration often “pop” up

from our subconscious. We experience these creative breakthroughs when we

are relaxed and not trying to access the part of the brain in which they reside,

which is generally the neocortex. When you say, “I just thought of

something,” you noticed your subconscious mind telling your conscious mind

something. With training, it’s possible to open this stream of communication.

Many people only see the conscious mind and aren’t aware of the benefits

of connecting it to the subconscious. They believe that the way to accomplish

more is to cram more into the conscious mind and make it work harder, but

this is often counterproductive. While it may seem counterintuitive, clearing

your head can be the best way to make progress.

Knowing this, I now understand why creativity comes to me when I relax

(like when I’m in the shower) and how meditation helps open this

connection. Because it is physiological, I can actually feel the creative

thoughts coming from elsewhere and flowing into my conscious mind. It’s a

kick to understand how that works.

But a note of caution is in order too: When thoughts and instructions come

to me from my subconscious, rather than acting on them immediately, I have

gotten into the habit of examining them with my conscious, logical mind. I

have found that in addition to helping me figure out which thoughts are valid

and why I am reacting to them as I do, doing this opens further

communication between my conscious and subconscious minds. It’s helpful

to write down the results of this process. In fact that’s how my Principles

came about.

If you take nothing else away from this chapter, be aware of your

subconscious—of how it can both harm you and help you, and how by

consciously reflecting on what comes out of it, perhaps with the help of

others, you can become happier and more effective.

b. Know that the most constant struggle is between feeling and thinking. There are

no greater battles than those between our feelings (most importantly

controlled by our amygdala, which operates subconsciously) and our rational

thinking (most importantly controlled by our prefrontal cortex, which

operates consciously). If you understand how those battles occur you will

understand why it is so important to reconcile what you get from your

subconscious with what you get from your conscious mind.

That damned amygdala, which is a little almond-shaped structure that lies

deeply embedded in the cerebrum, is one of the most powerful parts of your

brain. It controls your behavior, even though you’re not conscious of it. How

does it work? When something upsets us—and that something could be a

sound, a sight, or just a gut feeling—the amygdala sends notice to our bodies

to prepare to fight or flee: the heartbeat speeds up, the blood pressure rises,

and breathing quickens. During an argument, you’ll often notice a physical

response similar to how you react to fear (for instance, rapid heartbeats and

tensing muscles). Recognizing that, your conscious mind (which resides in

the prefrontal cortex) can refuse to obey its instructions. Typically, these

amygdala hijackings come on fast and dissipate quickly, except in rare cases,

such as when a person develops post-traumatic stress disorder from a

particularly horrible event or series of events. Knowing how these hijackings

work, you know that if you allow yourself to react spontaneously, you will be

prone to overreact. You can also comfort yourself with the knowledge that

whatever psychological pain you are experiencing will go away before very

long.

c. Reconcile your feelings and your thinking. For most people, life is a never-

ending battle between these two parts of the brain. While the amygdala’s

reactions come in spurts and then subside, reactions from the prefrontal

cortex are more gradual and constant. The biggest difference between people

who guide their own personal evolution and achieve their goals and those

who don’t is that those who make progress reflect on what causes their

amygdala hijackings.

d. Choose your habits well. Habit is probably the most powerful tool in your

brain’s toolbox. It is driven by a golf-ball-sized lump of tissue called the

basal ganglia at the base of the cerebrum. It is so deep-seated and instinctual

that we are not conscious of it, though it controls our actions.

If you do just about anything frequently enough over time, you will form a

habit that will control you. Good habits are those that get you to do what your

“upper-level you” wants, and bad habits are those that are controlled by your

“lower-level you” and stand in the way of your getting what your “upper-

level you” wants. You can create a better set of habits if you understand how

this part of your brain works. For example, you can develop a habit that will

make you “need” to work out at the gym.

Developing this skill takes some work. The first step is recognizing how

habits develop in the first place. Habit is essentially inertia, the strong

tendency to keep doing what you have been doing (or not doing what you

have not been doing). Research suggests that if you stick with a behavior for

approximately eighteen months, you will build a strong tendency to stick to it

nearly forever.

For a long time, I didn’t appreciate the extent to which habits control

people’s behavior. I experienced this at Bridgewater in the form of people

who agreed with our work principles in the abstract but had trouble living by

them; I also observed it with friends and family members who wanted to

achieve something but constantly found themselves working against their

own best interests.

Then I read Charles Duhigg’s best-selling book The Power of Habit,

which really opened my eyes. I recommend that you read it yourself if your

interest in this subject goes deeper than what I’m able to cover here.

Duhigg’s core idea is the role of the three-step “habit loop.” The first step is a

cue—some “trigger that tells your brain to go into automatic mode and which

habit to use,” according to Duhigg. Step two is the routine, “which can be

physical or mental or emotional.” Finally, there is a reward, which helps your

brain figure out if this particular loop is “worth remembering for the future.”

Repetition reinforces this loop until over time it becomes automatic. This

anticipation and craving is the key to what animal trainers call operant

conditioning, which is a method of training that uses positive reinforcement.

For example, dog trainers use a sound (typically a clicker) to reinforce

behavior by pairing that sound with a more desirable reward (typically food)

until the dog will perform the desired behavior when it merely hears the click.

In humans, Duhigg says, rewards can be just about anything, ranging “from

food or drugs that cause physical sensations, to emotional payoffs, such as

the feelings of pride that accompany praise or self-congratulation.”

Habits put your brain on “automatic pilot.” In neuroscientific terms, the

basal ganglia takes over from your cortex, so that you can execute activities

without even thinking about them.

Reading Duhigg’s book taught me that if you really want to change, the

best thing you can do is choose which habits to acquire and which to get rid

of and then go about doing that. To help you, I recommend that you write

down your three most harmful habits. Do that right now. Now pick one of

those habits and be committed to breaking it. Can you do that? That would be

extraordinarily impactful. If you break all three, you will radically improve

the trajectory of your life. Or you can pick habits that you want to acquire

and then acquire them.

The most valuable habit I’ve acquired is using pain to trigger quality

reflections. If you can acquire this habit yourself, you will learn what causes

your pain and what you can do about it, and it will have an enormous impact

on your effectiveness.

e. Train your “lower-level you” with kindness and persistence to build the right

habits. I used to think that the upper-level you needed to fight with the lower-

level you to gain control, but over time I’ve learned that it is more effective to

train that subconscious, emotional you the same way you would teach a child

to behave the way you would like him or her to behave—with loving

kindness and persistence so that the right habits are acquired.

f. Understand the differences between right-brained and left-brained thinking. Just

as your brain has its conscious upper part and its subconscious lower part, it

also has two halves called hemispheres.

You might have heard it said that

some people are more left-brained while others are more right-brained. That’s

not just a saying—Caltech professor Roger Sperry won the Nobel Prize in

medicine for discovering it. In a nutshell:

1. The left hemisphere reasons sequentially, analyzes details, and excels at

linear analysis. “Left-brained” or “linear” thinkers who are analytically

strong are often called “bright.”

2. The right hemisphere thinks across categories, recognizes themes, and

synthesizes the big picture. “Right-brained” or “lateral” thinkers with

more street smarts are often called “smart.”

The diagram on the left summarizes the qualities of “right-brained” and

“left-brained” thinking types.

Most people tend to get more of their instructions from one side than the

other and they have trouble understanding people who get theirs from the

opposite side. Our experience has been that left-brained folks tend to see

right-brained folks as “spacey” or “abstract,” while right-brained thinkers

tend to find left-brained thinkers “literal” or “narrow.” I have seen wonderful

results occur when people know where their own and others’ inclinations lie,

realize that both ways of thinking are invaluable, and assign responsibilities

accordingly.

g. Understand how much the brain can and cannot change. This brings us to an

important question: Can we change?

We can all learn new facts and skills,

but can we also learn to change how we are inclined to think? The answer is a

qualified yes.

Brain plasticity is what allows your brain to change its “softwiring.” For a

long time, scientists believed that after a certain critical period in childhood,

most of our brain’s neurological connections were fixed and highly unlikely

to change. But recent research has suggested that a wide variety of practices

—from physical exercise to studying to meditation—can lead to physical and

physiological changes in our brains that affect our abilities to think and form

memories. In a study of Buddhist monks who had practiced more than ten

thousand hours of meditation, researchers at the University of Wisconsin

measured significantly higher levels of gamma waves in their brains; these

waves are associated with perception and problem solving.

That doesn’t mean the brain is infinitely flexible. If you have a preference

for a certain way of thinking, you might be able to train yourself to operate

another way and find that easier to do over time, but you’re very unlikely to

change your underlying preference. Likewise, you may be able to train

yourself to be more creative, but if you’re not naturally creative, there’s likely

a limit to what you can do. That is simply reality, so we all might as well

accept it and learn how to deal with it. There are coping techniques that we

can use—for example, the creative, disorganized person who is likely to lose

track of time can develop the habit of using alarms; the person who isn’t

good at some type of thinking can train himself to rely on the thinking of

others who are better at it. The best way to change is through doing mental

exercises. As with physical exercise, this can be painful unless you enlist the

habit loop discussed earlier to connect the rewards to the actions, “rewiring”

your brain to love learning and beneficial change.

Remember that accepting your weaknesses is contrary to the instincts of

those parts of your brain that want to hold on to the illusion that you are

perfect. Doing the things that will reduce your instinctual defensiveness takes

practice, and requires operating in an environment that reinforces open-

mindedness.

As you’ll see when we get into Work Principles, I’ve developed a number

of tools and techniques that help overcome that resistance, individually and

across organizations. Instead of expecting yourself or others to change, I’ve

found that it’s often most effective to acknowledge one’s weaknesses and

create explicit guardrails against them. This is typically a faster and higher-

probability path to success.

4.4 Find out what you and others are like.

Because of the biases with which we are wired, our self-assessments (and our

assessments of others) tend to be highly inaccurate. Psychometric

assessments are much more reliable. They are important in helping explore

how people think during the hiring process and throughout employment.

Though psychometric assessments cannot fully replace speaking with people

and looking at their backgrounds and histories, they are far more powerful

than traditional interviewing and screening methods. If I had to choose

between just the assessments or just traditional job interviews to get at what

people are like, I would choose the assessments. Fortunately, we don’t have

to make that choice.

The four main assessments we use are the Myers-Briggs Type Indicator

(MBTI), the Workplace Personality Inventory, the Team Dimensions Profile,

and Stratified Systems Theory.

But we are constantly experimenting (for

example, with the Big Five) so our mix will certainly change. Whatever the

mix, they all convey people’s preferences for thinking and action. They also

provide us with new attributes and terminologies that clarify and amplify

those we had identified on our own. I will describe a few of them below.

These descriptions are based on my own experiences and learnings, which

are in many ways different from the official descriptions used by the

assessment companies.

a. Introversion vs. extroversion. Introverts focus on the inner world and get their

energy from ideas, memories, and experiences while extroverts are externally

focused and get their energy from being with people. Introversion and

extroversion are also linked to differences in communication styles. If you

have a friend who loves to “talk out” ideas (and even has trouble thinking

through something if there isn’t someone around to work it through with), he

or she is likely an extrovert. Introverts will usually find such conversations

painful, preferring to think privately and share only after they’ve worked

things out on their own. I’ve found that it is important to help each

communicate in the way that they feel most comfortable. For example,

introverts often prefer communicating in writing (such as email) rather than

speaking in group settings and tend to be less open with their critical

thoughts.

b. Intuiting vs. sensing. Some people see big pictures (forests) and others see

details (trees). In the Myers-Briggs framework, these ways of seeing are best

represented by the continuum from intuiting to sensing. You can get an idea

of people’s preferences by observing what they focus on. For example, when

reading, a sensing person who focuses on details can be thrown off by typos

such as “there” instead of “their,” while intuitive thinkers won’t even notice

the mistake. That is because the intuitive thinker’s attention is focused on the

context first and the details second. Naturally, you’d rather have a sensing

person than an intuitor preparing your legal documents, where every “i” must

be properly dotted and every “t” crossed just so.

c. Thinking vs. feeling. Some people make decisions based on logical analysis

of objective facts, considering all the known, provable factors important to a

given situation and using logic to determine the best course of action. This

approach is an indicator of a preference for thinking and is how you’d hope

your doctor thinks when he makes a diagnosis. Other people—who prefer

feeling—focus on harmony between people. They are better suited to roles

that require lots of empathy, interpersonal contact, and relationship building,

for example HR and customer service. Before we had assessments to identify

these differences, conversations between “Ts” and “Fs” were really

frustrating. Now we laugh as we bump up against our differences, because

we know what they are and can see them playing out in classic ways.

d. Planning vs. perceiving. Some people like to live in a planned, orderly way

and others prefer flexibility and spontaneity.

Planners (or “Judgers” in

Myers-Briggs terms) like to focus on a plan and stick with it, while

perceivers are prone to focus on what’s happening around them and adapt to

it. Perceivers work from the outside in; they see things happening and work

backward to understand the cause and how to respond; they also see many

possibilities that they compare and choose from—often so many that they are

confused by them. In contrast, planners work from the inside out, first

figuring out what they want to achieve and then how things should unfold.

Planners and perceivers have trouble appreciating each other. Perceivers see

new things and change direction often. This is discomforting to planners, who

weigh precedent much more heavily in their decision making, and assume if

it was done in a certain way before, it should be done in the same way again.

Similarly, planners can discomfort perceivers by being seemingly rigid and

slow to adapt.

e. Creators vs. refiners vs. advancers vs. executors vs. flexors. By identifying talents

and preferences that lead people to feel a particular way, you can place them

in jobs at which they will likely excel. At Bridgewater, we use a test called

the “Team Dimensions Profile” (TDP) to connect people with their preferred

role. The five types identified by the TDP are Creators, Refiners, Advancers,

Executors, and Flexors.

• Creators generate new ideas and original concepts. They prefer

unstructured and abstract activities and thrive on innovation and

unconventional practices.

• Advancers communicate these new ideas and carry them forward. They

relish feelings and relationships and manage the human factors. They are

excellent at generating enthusiasm for work.

• Refiners challenge ideas. They analyze projects for flaws, then refine

them with a focus on objectivity and analysis. They love facts and

theories and working with a systematic approach.

• Executors can also be thought of as Implementers. They ensure that

important activities are carried out and goals accomplished; they are

focused on details and the bottom line.

• Flexors are a combination of all four types. They can adapt their styles to

fit certain needs and are able to look at a problem from a variety of

perspectives.

Triangulating what I learn from each test reinforces or raises questions

about the pictures of people I’m forming in my head. For example, when

people’s MBTI results suggest a preference for “S” (focus on details) and “J”

(planful), and they come out as executors on the Team Dimension

assessment, there is a very good chance that they are more detail-focused

than right-brained and imaginative, which means that they would likely fit

better in jobs that have less ambiguity and more structure and clarity.

f. Focusing on tasks vs. focusing on goals. Some people are focused on daily tasks

while others are focused on their goals and how to achieve them. I’ve found

these differences to be quite similar to the differences between people who

are intuitive vs. sensing. Those who tend to focus on goals and “visualize”

best can see the big pictures over time and are also more likely to make

meaningful changes and anticipate future events. These goal-oriented people

can step back from the day-to-day and reflect on what and how they’re doing.

They are the most suitable for creating new things (organizations, projects,

etc.) and managing organizations that have lots of change. They typically

make the most visionary leaders because of their ability to take a broad view

and see the whole picture.

In contrast, those who tend to focus on daily tasks are better at managing

things that don’t change much or that require processes to be completed

reliably. Task-oriented people tend to make incremental changes that

reference what already exists. They are slower to depart from the status quo

and more likely to be blindsided by sudden events. On the other hand, they’re

typically more reliable. Although it may seem that their focus is narrower

than higher-level thinkers, the roles they play are no less critical. I would

never have gotten this book out or accomplished hardly anything else

worthwhile if I didn’t work with people who are wonderful at taking care of

details.

g. Workplace Personality Inventory. Another assessment we use is the

Workplace Personality Inventory, a test based on data from the U.S.

Department of Labor. It anticipates behavior and predicts job fit and

satisfaction, singling out certain key characteristics/qualities, including

persistence, independence, stress tolerance, and analytical thinking. This test

helps us understand what people value and how they will make trade-offs

between their values. For example, someone with low Achievement

Orientation and high Concern for Others might be unwilling to step on

others’ toes in order to accomplish their goals. Likewise, someone who is bad

at Rule Following may be more likely to think independently.

We have found that something like twenty-five to fifty attributes can

pretty well describe what a person is like. Each one comes in varying degrees

of strength (like color tones). If you know what they are and put them

together correctly, they will paint a pretty complete picture of a person. Our

objective is to use test results and other information to try to do just that. We

prefer to do it in partnership with the person being looked at, because it helps

us be more accurate and at the same time it’s very helpful to them to see

themselves objectively.

Certain attributes combine frequently to produce recognizable archetypes.

If you think about it, you can probably come up with a handful of archetypal

people you meet over and over again in life: the spacey, impractical Artist;

the tidy Perfectionist; the Crusher who runs through brick walls to get things

done; the Visionary who pulls amazing big ideas seemingly out of the air.

Over time I came up with a list of others, including Shaper, Chirper,

Tweaker, and Open-Minded Learner, as well as Advancer, Creator, Cat-

Herder, Gossiper, Loyal Doer, Wise Judge, and others.

To be clear, archetypes are less useful than the better fleshed-out pictures

created through the assessments. They are not precise; they are more like

simple caricatures, but they can be useful when it comes to assembling teams.

Individual people will always be more complex than the archetypes that

describe them, and they may well match up with more than one. For example,

the Spacey Artist may or may not also be a Perfectionist or may be a Crusher

too. While I won’t go over all of them, I will describe Shapers—the one that

best represents me—in some depth.

h. Shapers are people who can go from visualization to actualization. I wrote a lot

about the people I call “shapers” in the first part of this book. I use the word

to mean someone who comes up with unique and valuable visions and builds

them out beautifully, typically over the doubts of others. Shapers get both the

big picture and the details right. To me, it seems that Shaper = Visionary +

Practical Thinker + Determined.

I’ve found that shapers tend to share attributes such as intense curiosity

and a compulsive need to make sense of things, independent thinking that

verges on rebelliousness, a need to dream big and unconventionally, a

practicality and determination to push through all obstacles to achieve their

goals, and a knowledge of their own and others’ weaknesses and strengths so

they can orchestrate teams to achieve them. Perhaps even more importantly,

they can hold conflicting thoughts simultaneously and look at them from

different angles. They typically love to knock things around with other really

smart people and can easily navigate back and forth between the big picture

and the granular details, counting both as equally important.

People wired with enough of these ways of thinking that they can operate

in the world as shapers are very rare. But they could never succeed without

working with others who are more naturally suited for other things and whose

ways of thinking and acting are also essential.

Knowing how one is wired is a necessary first step on any life journey. It

doesn’t matter what you do with your life, as long as you are doing what is

consistent with your nature and your aspirations. Having spent time with

some of the richest, most powerful, most admired people in the world, as well

as some of the poorest, most disadvantaged people in the most obscure

corners of the globe, I can assure you that, beyond a basic level, there is no

correlation between happiness levels and conventional markers of success. A

carpenter who derives his deepest satisfaction from working with wood can

easily have a life as good or better than the president of the United States. If

you’ve learned anything from this book I hope it’s that everyone has

strengths and weaknesses, and everyone has an important role to play in life.

Nature made everything and everyone for a purpose. The courage that’s

needed the most isn’t the kind that drives you to prevail over others, but the

kind that allows you to be true to your truest self, no matter what other people

want you to be.

4.5 Getting the right people in the right roles in

support of your goal is the key to succeeding at

whatever you choose to accomplish.

Whether it’s in your private life or your work life, it is best for you to work

with others in such a way that each person is matched up with other

complementary people to create the best mix of attributes for their tasks.

a. Manage yourself and orchestrate others to get what you want. Your greatest

challenge will be having your thoughtful higher-level you manage your

emotional lower-level you. The best way to do that is to consciously develop

habits that will make doing the things that are good for you habitual. In

managing others, the analogy that comes to mind is a great orchestra. The

person in charge is the shaper-conductor who doesn’t “do” (e.g., doesn’t play

an instrument, though he or she knows a lot about instruments) as much as

visualize the outcome and sees to it that each member of the orchestra helps

achieve it. The conductor makes sure each member of the orchestra knows

what he or she is good at and what they’re not good at, and what their

responsibilities are. Each must not only perform at their personal best but

work together so the orchestra becomes more than the sum of its parts. One

of the conductor’s hardest and most thankless jobs is getting rid of people

who consistently don’t play well individually or with others. Most

importantly, the conductor ensures that the score is executed exactly as he or

she hears it in his or her head. “The music needs to sound this way,” she says,

and then she makes sure it does. “Bass players, bring out the structure. Here

are the connections, here’s the spirit.” Each section of the orchestra has its

own leaders—the concertmaster, the first chairs—who also help bring out the

composer’s and the conductor’s visions.

Approaching things in this way has helped me a lot. For example, with the

bond systemization project I mentioned earlier, having this new perspective

allowed us to better see the gaps between what we had and what we needed.

While Bob was a great intellectual partner to me in understanding the big-

picture problem we wanted to solve, he was much weaker at visualizing the

process required to get us from where we were to the solution. He also wasn’t

surrounding himself with the right people. He tended to want to work with

people who were like him, so his main deputy on the project was a great

sparring partner for mapping out big ideas on a whiteboard but a lousy one

for fleshing out the who, what, and when needed to bring those ideas to life.

This deputy tested as a “Flexor,” meaning that he was great at going in

whatever direction Bob wanted to but lacked the clear, independent view

needed to keep Bob on track.

After a few rounds of not making progress, we used our new tools for

understanding people and acted on them, pushing Bob to transition to a new

deputy who was especially skilled at navigating the levels between the big-

picture ideas and the discrete, smaller projects required to bring them about.

Comparing the new deputy’s Baseball Card to the original deputy’s, she

excelled in independent and systematic thinking, which were essential for

having a clear picture of what to do with Bob’s big ideas. This new deputy

brought on other layers of support, including a project manager who was less

engaged with the concepts and much more focused on the details of specific

tasks and deadlines. When we looked at the new team members’ Baseball

Cards, we could quickly see them lighting up in some of the areas around

being planful, concrete, and driving things to completion, which were areas

of weakness for Bob. With this new team in place, things really started to

hum. It was only by looking hard at the complete “Lego set” required to

achieve our goal—and then going out and finding the missing pieces—that

we were able to do it.

Bond systemization is just one of countless projects that have benefited

from our frank and open approach to understanding what people are like. And

to be clear, I have just scratched the surface of what there is to know about

mental wiring.

In the next chapter, I’ll bring everything you’ve read about up to now

together and break down the essentials of decision making. Some decisions

you should make yourself and some you should delegate to someone more

believable. Using self-knowledge to know which are which is the key to

success—no matter what it is you are trying to do.

29 Lots of data show that relationships are the greatest reward—that they’re more

important to your health and happiness than anything else. For example, as Robert

Waldinger, director of Harvard’s seventy-five-year Grant and Glueck study of adult males

from a variety of socioeconomic backgrounds, puts it, “You could have all the money

you’ve ever wanted, a successful career, and be in good physical health, but without loving

relationships, you won’t be happy . . . The good life is built with good relationships.”

30 A good book on this is A Whole New Mind by Daniel H. Pink, and a good article on the

science of this is “A Wandering Mind Heads Straight Toward Insight” by Robert Lee Hotz

from The Wall Street Journal. While many parts of the brain come in two halves, it’s only

the more recently developed cortex, which accounts for three-quarters of the brain, that has

been shown to have functional differences between the right and left sides.

31 That’s a big question. Entire specialties are dedicated to this question alone, and no one

answer is authoritative, certainly not mine. However, because knowing what can change is

important for people trying to manage themselves and others, I have looked fairly deeply

into the issue of brain plasticity. What I learned coincided with my own experiences, and I

will pass that along to you.

32 A brain-imaging study by Harvard-affiliated researchers at Massachusetts General

Hospital found physical changes in the brain after an eight-week meditation course.

Researchers identified increased activity in parts of the brain associated with learning,

memory, self-awareness, compassion, and introspection, as well as decreased activity in the

amygdala.

33 This test is helpful for seeing how people navigate levels and which levels they

naturally go to.

34 If you’d like to experience some of these assessments for yourself and see your own

results, visit assessments.principles.com.

35 On the MBTI scale, this continuum is described as “Judging” vs. “Perceiving” though I

prefer to use “Planning” as judging has other connotations. In MBTI language, judging

does not mean judgmental and perceiving does not mean perceptive.

5 Learn How to Make Decisions

Effectively

As a professional decision maker, I have spent my life studying how to make

decisions effectively and have constantly looked for rules and systems that

will improve my odds of being right and ending up with more of whatever it

is that I am after.

One of the most important things I’ve come to understand is that most of

the processes that go into everyday decision making are subconscious and

more complex than is widely understood. For example, think about how you

choose and maintain a safe distance behind the car in front of you when you

are driving. Now describe the process in enough detail that someone who has

never driven a car before can do it as well as you can, or so that it can be

programmed into the computer that controls an autonomous car. I bet you

can’t.

Now think about the challenge of making all of your decisions well, in a

systematic, repeatable way, and then being able to describe the processes so

clearly and precisely that anyone else can make the same quality decisions

under the same circumstances. That is what I aspire to do and have found to

be invaluable, even when highly imperfect.

While there is no one best way to make decisions, there are some universal

rules for good decision making. They start with:

5.1 Recognize that 1) the biggest threat to good

decision making is harmful emotions, and 2)

decision making is a two-step process (first

learning and then deciding).

Learning must come before deciding. As explained in Chapter One, your

brain stores different types of learning in your subconscious, your rote

memory bank, and your habits. But no matter how you acquire your

knowledge or where you store it, what’s most important is that what you

know paints a true and rich picture of the realities that will affect your

decision. That’s why it always pays to be radically open-minded and seek out

believable others as you do your learning. Many people have emotional

trouble doing this and block the learning that could help them make better

decisions. Remind yourself that it’s never harmful to at least hear an

opposing point of view.

Deciding is the process of choosing which knowledge should be drawn

upon—both the facts of this particular “what is” and your broader

understanding of the cause-effect machinery that underlies it—and then

weighing them to determine a course of action, the “what to do about it.”

This involves playing different scenarios through time to visualize how to get

an outcome consistent with what you want. To do this well, you need to

weigh first-order consequences against second- and third-order

consequences, and base your decisions not just on near-term results but on

results over time.

Failing to consider second- and third-order consequences is the cause of a

lot of painfully bad decisions, and it is especially deadly when the first

inferior option confirms your own biases. Never seize on the first available

option, no matter how good it seems, before you’ve asked questions and

explored. To prevent myself from falling into this trap, I used to literally ask

myself questions: Am I learning? Have I learned enough yet that it’s time for

deciding? After a while, you will just naturally and open-mindedly gather all

the relevant info, but in doing so you will have avoided the first pitfall of bad

decision making, which is to subconsciously make the decision first and then

cherry-pick the data that supports it.

But how does one learn well?

LEARNING WELL

For me, getting an accurate picture of reality ultimately comes down to two

things: being able to synthesize accurately and knowing how to navigate

levels.

Synthesis is the process of converting a lot of data into an accurate picture.

The quality of your synthesis will determine the quality of your decision

making. This is why it always pays to triangulate your views with people

who you know synthesize well. This raises your chances of having a good

synthesis, even if you feel like you’ve already done it yourself. No sensible

person should reject a believable person’s views without great fear of being

wrong.

To synthesize well, you must 1) synthesize the situation at hand, 2)

synthesize the situation through time, and 3) navigate levels effectively.

5.2 Synthesize the situation at hand.

Every day you are faced with an infinite number of things that come at you.

Let’s call them “dots.” To be effective, you need to be able to tell which dots

are important and which dots are not. Some people go through life collecting

all kinds of observations and opinions like pocket lint, instead of just keeping

what they need. They have “detail anxiety,” worrying about unimportant

things.

Sometimes small things can be important—for example, that little rattle in

your car’s engine could just be a loose piece of plastic or it could be a sign

your timing belt is about to snap. The key is having the higher-level

perspective to make fast and accurate judgments on what the real risks are

without getting bogged down in details.

Remember:

a. One of the most important decisions you can make is who you ask questions of.

Make sure they’re fully informed and believable. Find out who is responsible

for whatever you are seeking to understand and then ask them. Listening to

uninformed people is worse than having no answers at all.

b. Don’t believe everything you hear. Opinions are a dime a dozen and nearly

everyone will share theirs with you. Many will state them as if they are facts.

Don’t mistake opinions for facts.

c. Everything looks bigger up close. In all aspects of life, what’s happening today

seems like a much bigger deal than it will appear in retrospect. That’s why it

helps to step back to gain perspective and sometimes defer a decision until

some time passes.

d. New is overvalued relative to great. For example, when choosing which movie

to watch or what book to read, are you drawn to proven classics or the newest

big thing? In my opinion, it is smarter to choose the great over the new.

e. Don’t oversqueeze dots. A dot is just one piece of data from one moment in

time; keep that in perspective as you synthesize. Just as you need to sort big

from small, and what’s happening in the moment from overall patterns, you

need to know how much learning you can get out of any one dot without

overweighing it.

5.3 Synthesize the situation through time.

To see how the dots connect through time you must collect, analyze, and sort

different types of information, which isn’t easy. For example, let’s imagine a

day in which eight outcomes occur. Some are good, some bad. Let’s illustrate

this day as shown, with each type of event represented by a letter and the

quality of the outcome represented by its height.

In order to see the day this way, you must categorize outcomes by type

(signified by letters) and quality (the higher up the graph, the better), which

will require synthesizing a by-and-large assessment of each. (To make the

example more concrete, imagine you’re running an ice cream shop and the

W’s represent sales, the X’s represent customer experience ratings, the Y’s

represent press and reviews, the Z’s represent staff engagement, etc.) Keep in

mind that our example is a relatively simple one: just eight occurrences over

one day.

From the chart on the right, you can see that it was a great day for sales

(because the W’s are at the top) and a bad day for customer experience (the

X’s). You might conjecture why—maybe a crowd generated sales but

produced long lines.

Now let’s look at what a month of workdays looks like. Confusing, eh?

The chart below plots just the type X dots, which you can see are

improving.

People who are good at pulling out such patterns of events are rare and

essential, but as with most abilities, synthesizing through time is only

partially innate; even if you’re not good at it, you can get better through

practice. You’ll increase your chances of succeeding at it if you follow the

next principle.

a. Keep in mind both the rates of change and the levels of things, and the relationships

between them. When determining an acceptable rate of improvement for

something, it is its level in relation to the rate of change that matters. I often

see people lose sight of this. They say “it’s getting better” without noticing

how far below the bar it is and whether the rate of change will get it above

the bar in an acceptable amount of time. If someone who has been getting

grades of 30s and 40s on their tests raised their scores to 50s over the course

of a few months it would be accurate to say that they are getting better, but

they would still be woefully inadequate. Everything important in your life

needs to be on a trajectory to be above the bar and headed toward excellent at

an appropriate pace. The lines in the chart on the next page show how the

dots connect through time. A’s trajectory gets you above the bar in an

appropriate amount of time; B’s does not. To make good decisions, you need

to understand the reality of which of these two cases is happening.

b. Be imprecise. Understand the concept of “by-and-large” and use

approximations. Because our educational system is hung up on precision, the

art of being good at approximations is insufficiently valued. This impedes

conceptual thinking. For example, when asked to multiply 38 by 12, most

people do it the slow and hard way rather than simply rounding 38 up to 40,

rounding 12 down to 10, and quickly determining that the answer is about

400. Look at the ice cream shop example and imagine the value of quickly

seeing the approximate relationships between the dots versus taking the time

to see all the edges precisely. It would be silly to spend time doing that, yet

that’s exactly what most people do. “By-and-large” is the level at which you

need to understand most things in order to make effective decisions.

Whenever a big-picture “by-and-large” statement is made and someone

replies “Not always,” my instinctual reaction is that we are probably about to

dive into the weeds—i.e., into a discussion of the exceptions rather than the

rule, and in the process we will lose sight of the rule. To help people at

Bridgewater avoid this time waster, one of our just-out-of-college associates

coined a saying I often repeat: “When you ask someone whether something is

true and they tell you that it’s not totally true, it’s probably by-and-large

true.”

c. Remember the 80/20 Rule and know what the key 20 percent is. The 80/20 Rule

states that you get 80 percent of the value out of something from 20 percent

of the information or effort. (It’s also true that you’re likely to exert 80

percent of your effort getting the final 20 percent of value.) Understanding

this rule saves you from getting bogged down in unnecessary detail once

you’ve gotten most of the learning you need to make a good decision.

d. Be an imperfectionist. Perfectionists spend too much time on little differences

at the margins at the expense of the important things. There are typically just

five to ten important factors to consider when making a decision. It is

important to understand these really well, though the marginal gains of

studying even the important things past a certain point are limited.

5.4 Navigate levels effectively.

Reality exists at different levels and each of them gives you different but

valuable perspectives. It’s important to keep all of them in mind as you

synthesize and make decisions, and to know how to navigate between them.

Let’s say you’re looking at your hometown on Google Maps. Zoom in

close enough to see the buildings and you won’t be able to see the region

surrounding your town, which can tell you important things. Maybe your

town sits next to a body of water. Zoom in too close and you won’t be able to

tell if the shoreline is along a river, a lake, or an ocean. You need to know

which level is appropriate to your decision.

We are constantly seeing things at different levels and navigating between

them, whether we know it or not, whether we do it well or not, and whether

our objects are physical things, ideas, or goals. For example, you can

navigate levels to move from your values to what you do to realize them on a

day-to-day basis. This is what that looks like in outline:

1 The High-Level Big Picture: I want meaningful work that’s full of learning.

1.1 Subordinate Concept: I want to be a doctor.

• Sub-Point: I need to go to medical school.

• Sub-Sub Point: I need to get good grades in the sciences.

• Sub-Sub-Sub Point: I need to stay home tonight and study.

To observe how well you do this in your own life, pay attention to your

conversations. We tend to move between levels when we talk.

a. Use the terms “above the line” and “below the line” to establish which level a

conversation is on. An above-the-line conversation addresses the main points

and a below-the-line conversation focuses on the sub-points. When a line of

reasoning is jumbled and confusing, it’s often because the speaker has gotten

caught up in below-the-line details without connecting them back to the

major points. An above-the-line discourse should progress in an orderly and

accurate way to its conclusion, only going below the line when it’s necessary

to illustrate something about one of the major points.

b. Remember that decisions need to be made at the appropriate level, but they should

also be consistent across levels. For instance, if you want to have a healthy life,

you shouldn’t have twelve sausage links and a beer every day for breakfast.

In other words, you need to constantly connect and reconcile the data you’re

gathering at different levels in order to draw a complete picture of what’s

going on. Like synthesizing in general, some people are naturally better at

this than others, but anyone can learn to do this to one degree or another. To

do it well, it’s necessary to:

1. Remember that multiple levels exist for all subjects.

2. Be aware on what level you’re examining a given subject.

3. Consciously navigate levels rather than see subjects as undifferentiated

piles of facts that can be browsed randomly.

4. Diagram the flow of your thought processes using the outline template

shown on the previous page.

When you do all this with radical open-mindedness, you will become

more aware not just of what you’re seeing, but what you’re not seeing and

what others, perhaps, are. It’s a little like when jazz musicians jam; knowing

what level you’re on allows everyone to play in the same key. When you

know your own way of seeing and are open to others’ ways too, you can

create good conceptual jazz together rather than just screech at each other.

Now let’s go up a level and examine deciding.

DECIDE WELL

Using decision-making logic to produce the best long-term outcomes has

become its own science—one that employs probabilities and statistics, game

theory, and other tools. While many of these tools are helpful, the

fundamentals of effective decision making are relatively simple and timeless

—in fact they are genetically encoded in our brains to varying degrees.

Watch animals in the wild and you’ll see that they instinctively make

expected value calculations to optimize the energy they expend to find food.

Those that did this well prospered and passed on their genes through the

process of natural selection; those that did it poorly perished. While most

humans who do this badly won’t perish, they will certainly be penalized by

the process of economic selection.

As previously explained, there are two broad approaches to decision

making: evidence/logic-based (which comes from the higher- level brain) and

subconscious/emotion-based (which comes from the lower-level animal

brain).

5.5 Logic, reason, and common sense are your best

tools for synthesizing reality and understanding

what to do about it.

Be wary of relying on anything else. Unfortunately, numerous tests by

psychologists show that the majority of people follow the lower-level path

most of the time, which leads to inferior decisions without their realizing it.

As Carl Jung put it, “Until you make the unconscious conscious, it will direct

your life and you will call it fate.” It’s even more important that decision

making be evidence-based and logical when groups of people are working

together. If it’s not, the process will inevitably be dominated by the most

powerful rather than the most insightful participants, which is not only unfair

but suboptimal. Successful organizations have cultures in which evidence-

based decision making is the norm rather than the exception.

5.6 Make your decisions as expected value

calculations.

Think of every decision as a bet with a probability and a reward for being

right and a probability and a penalty for being wrong. Normally a winning

decision is one with a positive expected value, meaning that the reward times

its probability of occurring is greater than the penalty times its probability of

occurring, with the best decision being the one with the highest expected

value.

Let’s say the reward for being right is $100 and its probability is 60

percent, while the penalty for being wrong is also $100. If you multiply the

reward by the probability of being right you get $60 and if you multiply the

penalty by the probability of being wrong (40 percent) you get $40. If you

subtract the penalty from the reward, the difference is the expected value,

which in this case is positive (+$20). Once you understand expected value,

you also understand that it’s not always best to bet on what’s most probable.

For example, suppose something that has only a one-in-five chance (20

percent) of succeeding will return ten times (e.g., $1,000) the amount that it

will cost you if it fails ($100). Its expected value is positive ($120), so it’s

probably a smart decision, even though the odds are against you, as long as

you can also cover the loss. Play these probabilities over and over again and

they will surely give you winning results over time.

Though we mostly don’t carry out these calculations explicitly, we

constantly make them intuitively. For example, when you decide to take an

umbrella to the store even though there’s just a 40 percent chance of rain, or

you check your phone to confirm the directions somewhere, even though

you’re almost certain you know the way, you’re making expected value

calculations.

Sometimes it’s smart to take a chance even when the odds are

overwhelmingly against you if the cost of being wrong is negligible relative

to the reward that comes with the slim chance of being right. As the saying

goes, “It never hurts to ask.”

This principle made a big difference in my own life. Years ago, when I

was just starting my family, I saw a house that was perfect for us in every

way. The problem was that it wasn’t on the market and everyone I asked told

me the owner wasn’t interested in selling. To make matters worse, I was

pretty sure I would be turned down for an adequate mortgage. But I figured

that it wouldn’t cost me anything to call the owner to see if we could work

something out. As it turned out, not only was he willing to sell, he was

willing to give me a loan!

The same principle applies when the downside is terrible. For example,

even if the probability of your having cancer is low, it might pay to get

yourself tested when you have a symptom just to make sure.

To help you make expected value calculations well, remember that:

a. Raising the probability of being right is valuable no matter what your probability

of being right already is. I often observe people making decisions if their odds

of being right are greater than 50 percent. What they fail to see is how much

better off they’d be if they raised their chances even more (you can almost

always improve your odds of being right by doing things that will give you

more information). The expected value gain from raising the probability of

being right from 51 percent to 85 percent (i.e., by 34 percentage points) is

seventeen times more than raising the odds of being right from 49 percent

(which is probably wrong) to 51 percent (which is only a little more likely to

be right). Think of the probability as a measure of how often you’re likely to

be wrong. Raising the probability of being right by 34 percentage points

means that a third of your bets will switch from losses to wins. That’s why it

pays to stress-test your thinking, even when you’re pretty sure you’re right.

b. Knowing when not to bet is as important as knowing what bets are probably worth

making. You can significantly improve your track record if you only make the

bets that you are most confident will pay off.

c. The best choices are the ones that have more pros than cons, not those that don’t

have any cons at all. Watch out for people who argue against something

whenever they can find something—anything—wrong with it, without

properly weighing all the pluses and minuses. Such people tend to be poor

decision makers.

5.7 Prioritize by weighing the value of additional

information against the cost of not deciding.

Some decisions are best made after acquiring more information; some are

best made immediately. Just as you need to constantly sort the big from the

small when you are synthesizing what’s going on, you need to constantly

evaluate the marginal benefit of gathering more information against the

marginal cost of waiting to decide. People who prioritize well understand the

following:

a. All of your “must-dos” must be above the bar before you do your “like-to-dos.”

Separate your “must-dos” from your “like-to-dos” and don’t mistakenly slip

any “like-to-dos” onto the first list.

b. Chances are you won’t have time to deal with the unimportant things, which is

better than not having time to deal with the impor-tant things. I often hear people

say, “Wouldn’t it be good to do this or that?” It’s likely they are being

distracted from far more important things that need to be done well.

c. Don’t mistake possibilities for probabilities. Anything is possible. It’s the

probabilities that matter. Everything must be weighed in terms of its

likelihood and prioritized. People who can accurately sort probabilities from

possibilities are generally strong at “practical thinking”; they’re the opposite

of the “philosopher” types who tend to get lost in clouds of possibilities.

SHORTCUTS FOR BECOMING A GREAT

DECISION MAKER

Great decision makers don’t remember all of these steps in a rote way and

carry them out mechanically, yet they do follow them. That’s because

through time and experience they’ve learned to do most of them reflexively,

just as a baseball player catches a fly ball without thinking about how he’s

going to do it. If they had to call each of the principles up from their memory

and then run them through their slow conscious minds, they couldn’t possibly

handle all the things that are coming at them well. But there are a couple of

things that they do carry out consciously and you should do them too.

5.8 Simplify!

Get rid of irrelevant details so that the essential things and the relationships

between them stand out. As the saying goes, “Any damn fool can make it

complex. It takes a genius to make it simple.” Think of Picasso. He could

paint beautiful representational paintings from an early age, but he

continually pared down and simplified as his career progressed. Not everyone

has a mind that works that way, but just because you can’t do something

naturally doesn’t mean you can’t do it—you just have to have creativity and

determination. If necessary, you can seek the help of others.

5.9 Use principles.

Using principles is a way of both simplifying and improving your decision

making. While it might seem obvious to you by now, it’s worth repeating that

realizing that almost all “cases at hand” are just “another one of those,”

identifying which “one of those” it is, and then applying well-thought-out

principles for dealing with it. This will allow you to massively reduce the

number of decisions you have to make (I estimate by a factor of something

like 100,000) and will lead you to make much better ones. The key to doing

this well is to:

1. Slow down your thinking so you can note the criteria you are using to

make your decision.

2. Write the criteria down as a principle.

3. Think about those criteria when you have an outcome to assess, and

refine them before the next “one of those” comes along.

Identifying which “one of those” each thing is is like identifying which

species an animal is. Doing that for each thing and then matching it up with

the appropriate principles will become like playing a game, so it will be fun

as well as helpful. Of course it can also be challenging. Many “cases at

hand,” as I call them, are hybrids. When a case at hand contains a few

“another ones of those,” one must weigh different principles against each

other, using mental maps of how the different types of things I encounter

should be handled. To help people do that, I created a tool called a Coach,

which is explained in the Appendix.

You can use your own principles, or you can use others’; you just want to

use the best ones possible well. If you think that way constantly, you will

become an excellent principled thinker.

5.10 Believability weight your decision making

I have found triangulating with highly believable people who are willing to

have thoughtful disagreements has never failed to enhance my learning and

sharpen the quality of my decision making. It typically leads me to make

better decisions than I could have otherwise and it typically provides me with

thrilling learning. I urge you to do it.

To do it well, be sure to avoid the common perils of: 1) valuing your own

believability more than is logical and 2) not distinguishing between who is

more or less credible.

In case of a disagreement with others, start by seeing if you can agree on

the principles that should be used to make that decision. This discussion

should include exploring the merits of the reasoning behind the different

principles. If you agree on them, apply them to the case at hand and you’ll

arrive at a conclusion everyone agrees on. If you disagree on the principles,

try to work through your disagreement based on your respective

believabilities. I will explain how we do this in more detail in Work

Principles.

This sort of principled and believability-weighted decision making is

fascinating and leads to much different and much better decision making than

is typical. For example, imagine if we used this approach to choose the

president. It would be fascinating to see which principles we would come up

with both for determining what makes a good president as well as for

deciding who is most believable in making such determinations. Would we

wind up with something like one person one vote, or something different?

And if different, in what ways? It certainly would lead to very different

outcomes. During the next election, let’s do this in parallel with our ordinary

electoral process so we can see the difference.

While believability-weighted decision making can sound complicated,

chances are you do it all the time—pretty much whenever you ask yourself,

“Who should I listen to?” But it’s almost certainly true that you’d do it a lot

better if you gave more thought to it.

5.11 Convert your principles into algorithms and

have the computer make decisions alongside

you.

If you can do that, you will take the power of your decision making to a

whole other level. In many cases, you will be able to test how that principle

would have worked in the past or in various situations that will help you

refine it, and in all cases, it will allow you to compound your understanding

to a degree that would otherwise be impossible. It will also take emotion out

of the equation. Algorithms work just like words in describing what you

would like to have done, but they are written in a language that the computer

can understand. If you don’t know how to speak this language, you should

either learn it or have someone close to you who can translate for you. Your

children and their peers must learn to speak this language because it will soon

be as important or more important than any other language.

By developing a partnership with your computer alter ego in which you

teach each other and each do what you do best, you will be much more

powerful than if you went about your decision making alone. The computer

will also be your link to great collective decision making, which is far more

powerful than individual decision making, and will almost certainly advance

the evolution of our species.

SYSTEMIZED AND COMPUTERIZED DECISION

MAKING

In the future, artificial intelligence will have a profound impact on how we

make decisions in every aspect of our lives—especially when combined with

the new era of radical transparency about people that’s already upon us. Right

now, whether you like it or not, it is easy for anyone to access your digital

data to learn a tremendous amount about what you’re like, and this data can

be fed into computers that do everything from predict what you’re likely to

buy to what you value in life. While this sounds scary to many people, at

Bridgewater we have been combining radical transparency with algorithmic

decision making for more than thirty years and have found that it produces

remarkable results. In fact, I believe that it won’t be long before this kind of

computerized decision making guides us nearly as much as our brains do

now.

The concept of artificial intelligence is not new. Even back in the 1970s,

when I first started experimenting with computerized decision making, it had

already been around for nearly twenty years (the term “artificial intelligence”

was first introduced in 1956 at a conference at Dartmouth College). While a

lot has changed since then, the basic concepts remain the same.

To give you just one ultrasimple example of how computerized decision

making works, let’s say you have two principles for heating your home: You

want to turn the heat on when the temperature falls below 68 and you want to

turn the heat off between midnight and 5:00 a.m. You can express the

relationship between these criteria in a simple decision-making formula: If

the temperature is less than 68 degrees and the time is not between 5:00 a.m.

and midnight, then turn on the heat. By gathering many such formulas, it’s

possible to create a decision-making system that takes in data, applies and

weighs the relevant criteria, and recommends a decision.

THINKING

PRINCIPLES

ALGORITHMS

Specifying our investment decision-making criteria in algorithms and

running historical data through them, or specifying our work principles in

algorithms and using them to aid in management decision making, are just

bigger and more complicated versions of that smart thermostat. They allow

us to make more informed and less emotional decisions much faster than we

could on our own.

I believe that people will increasingly do this and that computer coding

will become as essential as writing. In time, we will use machine assistants as

much for decision making as we do for information gathering today. As these

machines help us, they will learn about what we are like—what we value,

what our strengths and weaknesses are—and they will be able to tailor the

advice they give us by automatically seeking out the help of others who are

strong where we are weak. It won’t be long before our machine assistants are

speaking to others’ machine assistants and collaborating in this way. In fact,

that’s beginning to happen already.

Imagine a world in which you can use technology to connect to a system

in which you can input the issue you’re dealing with and have exchanges

about what you should do and why with the highest-rated thinkers in the

world. We’ll soon be able to do this. Before too long, you will be able to tap

the highest-quality thinking on nearly every issue you face and get the

guidance of a computerized system that weighs different points of view. For

example, you will be able to ask what lifestyle or career you should choose

given what you’re like, or how to best interact with specific people based on

what they’re like. These innovations will help people get out of their own

heads and unlock an incredibly powerful form of collective thinking. We are

doing this now and have found it way better than traditional thinking.

While this kind of view often leads to talk of artificial intelligence

competing with human intelligence, in my opinion human and artificial

intelligence are far more likely to work together because that will produce the

best results. It’ll be decades—and maybe never—before the computer can

replicate many of the things that the brain can do in terms of imagination,

synthesis, and creativity. That’s because the brain comes genetically

programmed with millions of years of abilities honed through evolution. The

“science” of decision making that underlies many computer systems remains

much less valuable than the “art.” People still make the most important

decisions better than computers do. To see this, you need look no further than

at the kinds of people who are uniquely successful. Software developers,

mathematicians, and game-theory modelers aren’t running away with all the

rewards; it is the people who have the most common sense, imagination, and

determination.

Only human intelligence can apply the interpretations that are required to

provide computer models with appropriate input. For example, a computer

can’t tell you how to weigh the value of the time you spend with your loved

ones against the time you spend at work or the optimal mix of hours that will

provide you with the best marginal utilities for each activity. Only you know

what you value most, who you want to share your life with, what kind of

environment you want to be in, and ultimately how to make the best choices

to bring those things about. What’s more, so much of our thinking comes

from the subconscious in ways we don’t understand, that thinking we can

model it fully is as unlikely as an animal that has never experienced abstract

thinking attempting to define and replicate it.

Yet at the same time, the brain cannot compete with the computer in many

ways. Computers have much greater “determination” than any person, as they

will work 24/7 for you. They can process vastly more information, and they

can do it much faster, more reliably, and more objectively than you could

ever hope to. They can bring millions of possibilities that you never thought

of to your attention. Perhaps most important of all, they are immune to the

biases and consensus-driven thinking of crowds; they don’t care if what they

see is unpopular, and they never panic. During those terrible days after 9/11,

when the whole country was being whipsawed by emotion, or the weeks

between September 19 and October 10, 2008, when the Dow fell 3,600

points, there were times I felt like hugging our computers. They kept their

cool no matter what.

This combination of man and machine is wonderful. The process of man’s

mind working with technology is what elevates us—it’s what has taken us

from an economy where most people dig in the dirt to today’s Information

Age. It’s for that reason that people who have common sense, imagination,

and determination, who know what they value and what they want, and who

also use computers, math, and game theory, are the best decision makers

there are. At Bridgewater, we use our systems much as a driver uses a GPS in

a car: not to substitute for our navigational abilities but to supplement them.

5.12 Be cautious about trusting AI without having

deep understanding.

I worry about the dangers of AI in cases where users accept—or, worse, act

upon—the cause-effect relationships presumed in algorithms produced by

machine learning without understanding them deeply.

Before I explain why, I want to clarify my terms. “Artificial intelligence”

and “machine learning” are words that are thrown around casually and often

used as synonyms, even though they are quite different. I categorize what is

going on in the world of computer-aided decision making under three broad

types: expert systems, mimicking, and data mining (these categories are mine

and not the ones in common use in the technology world).

Expert systems are what we use at Bridgewater, where designers specify

criteria based on their logical understandings of a set of cause-effect

relationships, and then see how different scenarios would emerge under

different circumstances.

But computers can also observe patterns and apply them in their decision

making without having any understanding of the logic behind them. I call

such an approach “mimicking.” This can be effective when the same things

happen reliably over and over again and are not subject to change, such as in

a game bounded by hard-and-fast rules. But in the real world things do

change, so a system can easily fall out of sync with reality.

The main thrust of machine learning in recent years has gone in the

direction of data mining, in which powerful computers ingest massive

amounts of data and look for patterns. While this approach is popular, it’s

risky in cases when the future might be different from the past. Investment

systems built on machine learning that is not accompanied by deep

understanding are dangerous because when some decision rule is widely

believed, it becomes widely used, which affects the price. In other words, the

value of a widely known insight disappears over time. Without deep

understanding, you won’t know if what happened in the past is genuinely of

value and, even if it was, you will not be able to know whether or not its

value has disappeared—or worse. It’s common for some decision rules to

become so popular that they push the price far enough that it becomes

smarter to do the opposite.

Remember that computers have no common sense. For example, a

computer could easily misconstrue the fact that people wake up in the

morning and then eat breakfast to indicate that waking up makes people

hungry. I’d rather have fewer bets (ideally uncorrelated ones) in which I am

highly confident than more bets I’m less confident in, and would consider it

intolerable if I couldn’t argue the logic behind any of my decisions. A lot of

people vest their blind faith in machine learning because they find it much

easier than developing deep understanding. For me, that deep understanding

is essential, especially for what I do.

I don’t mean to imply that these mimicking or data-mining systems, as I

call them, are useless. In fact, I believe that they can be extremely useful in

making decisions in which the future range and configuration of events are

the same as they’ve been in the past. Given enough computing power, all

possible variables can be taken into consideration. For example, by analyzing

data about the moves that great chess players have made under certain

circumstances, or the procedures great surgeons have used during certain

types of operations, valuable programs can be created for chess playing or

surgery. Back in 1997, the computer program Deep Blue beat Garry

Kasparov, the world’s highest-ranked chess player, using just this approach.

But this approach fails in cases where the future is different from the past and

you don’t know the cause-effect relationships well enough to recognize them

all. Understanding these relationships as I do has saved me from making

mistakes when others did, most obviously in the 2008 financial crisis. Nearly

everyone else assumed that the future would be similar to the past. Focusing

strictly on the logical cause-effect relationships was what allowed us to see

what was really going on.

When you get down to it, our brains are essentially computers that are

programmed in certain ways, take in data, and spit out instructions. We can

program the logic in both the computer that is our mind and the computer that

is our tool so that they can work together and even double-check each other.

Doing that is fabulous.

For example, suppose we were trying to derive the universal laws that

explain species change over time. Theoretically, with enough processing

power and time, this should be possible. We would need to make sense of the

formulas the computer produces, of course, to make sure that they are not

data-mined gibberish, by which I mean based on correlations that are not

causal in any way. We would do this by constantly simplifying these rules

until their elegance is unmistakable.

Of course, given our brain’s limited capacity and processing speed, it

could take us forever to achieve a rich understanding of all the variables that

go into evolution. Is all the simplifying and understanding that we employ in

our expert systems truly required? Maybe not. There is certainly a risk that

changes not in the tested data might still occur. But one might argue that if

our data-mining-based formulas seem able to account for the evolution of all

species through all time, then the risks of relying on them for just the next

ten, twenty, or fifty years is relatively low compared to the benefits of having

a formula that appears to work but is not fully understandable (and that, at the

very least, might prove useful in helping scientists cure genetic diseases).

In fact, we may be too hung up on understanding; conscious thinking is

only one part of understanding. Maybe it’s enough that we derive a formula

for change and use it to anticipate what is yet to come. I myself find the

excitement, lower risk, and educational value of achieving a deep

understanding of cause-effect relationships much more appealing than a

reliance on algorithms I don’t understand, so I am drawn to that path. But is it

my lower-level preferences and habits that are pulling me in this direction or

is it my logic and reason? I’m not sure. I look forward to probing the best

minds in artificial intelligence on this (and having them probe me).

Most likely, our competitive natures will compel us to place bigger and

bigger bets on relationships computers find that are beyond our

understanding. Some of those bets will pay off, while others will backfire. I

suspect that AI will lead to incredibly fast and remarkable advances, but I

also fear that it could lead to our demise.

We are headed for an exciting and perilous new world. That’s our reality.

And as always, I believe that we are much better off preparing to deal with it

than wishing it weren’t true.

In order to have

the best life

possible, you have

to:

1) know what the

best decisions are

and

2) have the

courage to make

them.

LIFE PRINCIPLES: PUTTING IT ALL

TOGETHER

In Life Principles, I’ve explained some principles that helped me do both of

these things. I believe that because the same kinds of things happen over and

over again, a relatively few well-thought-out principles will allow you to deal

with just about anything that reality throws at you. Where you get these

principles from doesn’t matter as much as having them and using them

consistently—and that you never stop refining and improving them.

To acquire principles that work, it’s essential that you embrace reality

and deal with it well. Don’t fall into the common trap of wishing that reality

worked differently than it does or that your own realities were different.

Instead, embrace your realities and deal with them effectively. After all,

making the most of your circumstances is what life is all about. This includes

being transparent with your thoughts and open-mindedly accepting the

feedback of others. Doing so will dramatically increase your learning.

Along your journey you will inevitably experience painful failures. It is

important to realize that they can either be the impetus that fuels your

personal evolution or they can ruin you, depending on how you react to them.

I believe that evolution is the greatest force in the universe and that we all

evolve in basically the same way. Conceptually, it looks like a series of loops

that either lead upward toward constant improvement or remain flat or even

trend downward toward ruin. You will determine what your own loops look

like.

Your evolutionary process can be described as a 5-Step Process for

getting what you want. It consists of setting goals, identifying and not

tolerating problems, diagnosing problems, coming up with designs to get

around them, and then doing the tasks required. The important thing to

remember is that no one can do all the steps well, but that it’s possible to rely

on others to help. Different people with different abilities working well

together create the most powerful machines to produce achievements.

If you’re willing to confront reality, accept the pain that comes with doing

so, and follow the 5-Step Process to drive yourself toward your goals, you’re

on the path to success. Yet most people fail to do this because they hold on to

bad opinions that could easily be rectified by going above themselves to

objectively look down at their situation and weigh what they and others think

about it. It’s for that reason I believe you must be radically open-minded.

Our biggest barriers for doing this well are our ego barrier and our blind

spot barrier. The ego barrier is our innate desire to be capable and have others

recognize us as such. The blind spot barrier is the result of our seeing things

through our own subjective lenses; both barriers can prevent us from seeing

how things really are. The most important antidote for them is radical open-

mindedness, which is motivated by the genuine worry that one might not be

seeing one’s choices optimally. It is the ability to effectively explore different

points of view and different possibilities without letting your ego or your

blind spots get in your way.

Doing this well requires practicing thoughtful disagreement, which is the

process of seeking out brilliant people who disagree with you in order to see

things through their eyes and gain a deeper understanding. Doing this will

raise your probability of making good decisions and will also give you a

fabulous education. If you can learn radical open-mindedness and practice

thoughtful disagreement, you’ll radically increase your learning.

Finally, being radically open-minded requires you to have an accurate

self-assessment of your own and others’ strengths and weaknesses. This is

where understanding something about how the brain works and the different

psychometric assessments that can help you discover what your own brain is

like comes in. To get the best results out of yourself and others, you must

understand that people are wired very differently.

In a nutshell, learning how to make decisions in the best possible way and

learning to have the courage to make them comes from a) going after what

you want, b) failing and reflecting well through radical open-mindedness, and

c) changing/evolving to become ever more capable and less fearful. In the

final chapter of this section, Learn How to Make Decisions Effectively, I

shared some more granular principles for how to do all of the above and

weigh your options in specific situations to determine the right path to follow.

You can of course do all of these things alone, but if you’ve understood

anything about the concept of radical open-mindedness, it should be obvious

that going it alone will only take you so far. We all need others to help us

triangulate and get to the best possible decisions—and to help us see our

weaknesses objectively and compensate for them. More than anything else,

your life is affected by the people around you and how you interact with each

other.

Your ability to get what you want when working with others who want the

same things is much greater than your ability to get these things by yourself.

Yet we haven’t talked about how groups should operate to be most effective.

That’s what we’ll do in Work Principles.

Work Principles is about people working together. Because the power of a

group is so much greater than the power of an individual, the principles that

follow are likely even more important than those we covered up to this point.

In fact, I wrote them first and then wrote Life Principles in order to help

others make sense of the approach I was implicitly applying in running

Bridgewater. My Work Principles are basically the Life Principles you just

read, applied to groups. I will show you, principle by principle, how an

actual, practical, believability-weighted decision-making system converts

independent thinking into effective group decision making. I believe that

such a system can work to make any kind of organization—business,

government, philanthropic—both more effective and more satisfying to

belong to.

I hope these

principles will

help you struggle

well and get all

the joy you can

out of life.

SUMMARY AND TABLE OF LIFE PRINCIPLES
• Think for yourself to decide 1) what you want, 2) what is true, and 3)
what you should do to achieve #1 in light of #2, and do that with
humility and open-mindedness so that you consider the best thinking
available to you.
LIFE PRINCIPLES INTRODUCTION
• Look to the patterns of those things that affect you in order to understand
the cause-effect relationships that drive them and to learn principles for
dealing with them effectively.
PART II: LIFE PRINCIPLES
1 Embrace Reality and Deal with It
1.1 Be a hyperrealist.
a. Dreams + Reality + Determination = A Successful Life.
1.2 Truth—or, more precisely, an accurate understanding of reality—is the
essential foundation for any good outcome.
1.3 Be radically open-minded and radically transparent.
a. Radical open-mindedness and radical transparency are invaluable for rapid
learning and effective change.
b. Don’t let fears of what others think of you stand in your way.
c. Embracing radical truth and radical transparency will bring more meaningful
work and more meaningful relationships.
1.4 Look to nature to learn how reality works.
a. Don’t get hung up on your views of how things “should” be because you will
miss out on learning how they really are.
b. To be “good,” something must operate consistently with the laws of reality
and contribute to the evolution of the whole; that is what is most rewarded.
c. Evolution is the single greatest force in the universe; it is the only thing that is
permanent and it drives everything.
d. Evolve or die.
1.5 Evolving is life’s greatest accomplishment and its greatest reward.
a. The individual’s incentives must be aligned with the group’s goals.
b. Reality is optimizing for the whole—not for you.

c. Adaptation through rapid trial and error is invaluable.
d. Realize that you are simultaneously everything and nothing—and decide what
you want to be.
e. What you will be will depend on the perspective you have.
1.6 Understand nature’s practical lessons.
a. Maximize your evolution.
b. Remember “no pain, no gain.”
c. It is a fundamental law of nature that in order to gain strength one has to push
one’s limits, which is painful.
1.7 Pain + Reflection = Progress.
a. Go to the pain rather than avoid it.
b. Embrace tough love.
1.8 Weigh second- and third-order consequences.
1.9 Own your outcomes.
1.10 Look at the machine from the higher level.
a. Think of yourself as a machine operating within a machine and know that you
have the ability to alter your machines to produce better outcomes.
b. By comparing your outcomes with your goals, you can determine how to
modify your machine.
c. Distinguish between you as the designer of your machine and you as a worker
with your machine.
d. The biggest mistake most people make is to not see themselves and others
objectively, which leads them to bump into their own and others’ weaknesses
again and again.
e. Successful people are those who can go above themselves to see things
objectively and manage those things to shape change.
f. Asking others who are strong in areas where you are weak to help you is a
great skill that you should develop no matter what, as it will help you develop
guardrails that will prevent you from doing what you shouldn’t be doing.
g. Because it is difficult to see oneself objectively, you need to rely on the input
of others and the whole body of evidence.
h. If you are open-minded enough and determined, you can get virtually
anything you want.
2 Use the 5-Step Process to Get What You Want Out of Life
2.1 Have clear goals.
a. Prioritize: While you can have virtually anything you want, you can’t have
everything you want.
b. Don’t confuse goals with desires.
c. Decide what you really want in life by reconciling your goals and your
desires.
d. Don’t mistake the trappings of success for success itself.
e. Never rule out a goal because you think it’s unattainable.

f. Remember that great expectations create great capabilities.
g. Almost nothing can stop you from succeeding if you have a) flexibility and b)
self-accountability.
h. Knowing how to deal well with your setbacks is as important as knowing how
to move forward.
2.2 Identify and don’t tolerate problems.
a. View painful problems as potential improvements that are screaming at you.
b. Don’t avoid confronting problems because they are rooted in harsh realities
that are unpleasant to look at.
c. Be specific in identifying your problems.
d. Don’t mistake a cause of a problem with the real problem.
e. Distinguish big problems from small ones.
f. Once you identify a problem, don’t tolerate it.
2.3 Diagnose problems to get at their root causes.
a. Focus on the “what is” before deciding “what to do about it.”
b. Distinguish proximate causes from root causes.
c. Recognize that knowing what someone (including you) is like will tell you
what you can expect from them.
2.4 Design a plan.
a. Go back before you go forward.
b. Think about your problem as a set of outcomes produced by a machine.
c. Remember that there are typically many paths to achieving your goals.
d. Think of your plan as being like a movie script in that you visualize who will
do what through time.
e. Write down your plan for everyone to see and to measure your progress
against.
f. Recognize that it doesn’t take a lot of time to design a good plan.
2.5 Push through to completion.
a. Great planners who don’t execute their plans go nowhere.
b. Good work habits are vastly underrated.
c. Establish clear metrics to make certain that you are following your plan.
2.6 Remember that weaknesses don’t matter if you find solutions.
a. Look at the patterns of your mistakes and identify at which step in the 5-Step
Process you typically fail.
b. Everyone has at least one big thing that stands in the way of their success;
find yours and deal with it.
2.7 Understand your own and others’ mental maps and humility.
3 Be Radically Open-Minded
3.1 Recognize your two barriers.
a. Understand your ego barrier.
b. Your two “yous” fight to control you.
c. Understand your blind spot barrier.

3.2 Practice radical open-mindedness.
a. Sincerely believe that you might not know the best possible path and
recognize that your ability to deal well with “not knowing” is more important
than whatever it is you do know.
b. Recognize that decision making is a two-step process: First take in all the
relevant information, then decide.
c. Don’t worry about looking good; worry about achieving your goal.
d. Realize that you can’t put out without taking in.
e. Recognize that to gain the perspective that comes from seeing things through
another’s eyes, you must suspend judgment for a time—only by empathizing
can you properly evaluate another point of view.
f. Remember that you’re looking for the best answer, not simply the best answer
that you can come up with yourself.
g. Be clear on whether you are arguing or seeking to understand, and think about
which is most appropriate based on your and others’ believability.
3.3  Appreciate the art of thoughtful disagreement.
3.4 Triangulate your view with believable people who are willing to disagree.
a. Plan for the worst-case scenario to make it as good as possible.
3.5 Recognize the signs of closed-mindedness and open-mindedness that you
should watch out for.
3.6 Understand how you can become radically open-minded.
a. Regularly use pain as your guide toward quality reflection.
b. Make being open-minded a habit.
c. Get to know your blind spots.
d. If a number of different believable people say you are doing something wrong
and you are the only one who doesn’t see it that way, assume that you are
probably biased.
e. Meditate.
f. Be evidence-based and encourage others to be the same.
g. Do everything in your power to help others also be open-minded.
h. Use evidence-based decision-making tools.
i. Know when it’s best to stop fighting and have faith in your decision-making
process.
4 Understand That People Are Wired Very Differently
4.1 Understand the power that comes from knowing how you and others are
wired.
a. We are born with attributes that can both help us and hurt us, depending on
their application.
4.2 Meaningful work and meaningful relationships aren’t just nice things we
chose for ourselves—they are genetically programmed into us.
4.3 Understand the great brain battles and how to control them to get what
“you” want.

a. Realize that the conscious mind is in a battle with the subconscious mind.
b. Know that the most constant struggle is between feeling and thinking.
c. Reconcile your feelings and your thinking.
d. Choose your habits well.
e. Train your “lower-level you” with kindness and persistence to build the right
habits.
f. Understand the differences between right-brained and left-brained thinking.
g. Understand how much the brain can and cannot change.
4.4 Find out what you and others are like.
a. Introversion vs. extroversion.
b. Intuiting vs. sensing.
c. Thinking vs. feeling.
d. Planning vs. perceiving.
e. Creators vs. refiners vs. advancers vs. executors vs. flexors.
f. Focusing on tasks vs. focusing on goals.
g. Workplace Personality Inventory.
h. Shapers are people who can go from visualization to actualization.
4.5 Getting the right people in the right roles in support of your goal is the key to
succeeding at whatever you choose to accomplish.
a. Manage yourself and orchestrate others to get what you want.
5 Learn How to Make Decisions Effectively
5.1 Recognize that 1) the biggest threat to good decision making is harmful
emotions, and 2) decision making is a two-step process (first learning and
then deciding).
5.2 Synthesize the situation at hand.
a. One of the most important decisions you can make is who you ask questions
of.
b. Don’t believe everything you hear.
c. Everything looks bigger up close.
d. New is overvalued relative to great.
e. Don’t oversqueeze dots.
5.3 Synthesize the situation through time.
a. Keep in mind both the rates of change and the levels of things, and the
relationships between them.
b. Be imprecise.
c. Remember the 80/20 Rule and know what the key 20 percent is.
d. Be an imperfectionist.
5.4 Navigate levels effectively.
a. Use the terms “above the line” and “below the line” to establish which level a
conversation is on.
b. Remember that decisions need to be made at the appropriate level, but they
should also be consistent across levels.

5.5 Logic, reason, and common sense are your best tools for synthesizing reality
and understanding what to do about it.
5.6 Make your decisions as expected value calculations.
a. Raising the probability of being right is valuable no matter what your
probability of being right already is.
b. Knowing when not to bet is as important as knowing what bets are probably
worth making.
c. The best choices are the ones that have more pros than cons, not those that
don’t have any cons at all.
5.7 Prioritize by weighing the value of additional information against the cost of
not deciding.
a. All of your “must-dos” must be above the bar before you do your “like-to-
dos.”
b. Chances are you won’t have time to deal with the unimportant things, which
is better than not having time to deal with the important things.
c. Don’t mistake possibilities for probabilities.
5.8 Simplify!
5.9 Use principles.
5.10 Believability weight your decision making.
5.11 Convert your principles into algorithms and have the computer make decisions
alongside you.
5.12 Be cautious about trusting AI without having deep understanding.

PART III

WORK PRINCIPLES

SUMMARY AND TABLE OF WORK PRINCIPLES
I’m including this summary and table of Work Principles here so that you have the
choice of skimming them all, finding the ones you’re most interested in, or skipping
this section and continuing your reading on page 296.
PART III: WORK PRINCIPLES
• An organization is a machine consisting of two major parts: culture and
people.
a. A great organization has both great people and a great culture.
b. Great people have both great character and great capabilities.
c. Great cultures bring problems and disagreements to the surface and solve
them well, and they love imagining and building great things that haven’t
been built before.
• Tough love is effective for achieving both great work and great
relationships.
a. In order to be great, one can’t compromise the uncompromisable.
• A believability-weighted idea meritocracy is the best system for making
effective decisions.
• Make your passion and your work one and the same and do it with people
you want to be with.
TO GET THE CULTURE RIGHT . . .
1 Trust in Radical Truth and Radical Transparency
1.1 Realize that you have nothing to fear from knowing the truth.
1.2 Have integrity and demand it from others.
a. Never say anything about someone that you wouldn’t say to them directly and
don’t try people without accusing them to their faces.
b. Don’t let loyalty to people stand in the way of truth and the well-being of the
organization.
1.3 Create an environment in which everyone has the right to understand what
makes sense and no one has the right to hold a critical opinion without
speaking up.
a. Speak up, own it, or get out.

b. Be extremely open.
c. Don’t be naive about dishonesty.
1.4 Be radically transparent.
a. Use transparency to help enforce justice.
b. Share the things that are hardest to share.
c. Keep exceptions to radical transparency very rare.
d. Make sure those who are given radical transparency recognize their
responsibilities to handle it well and to weigh things intelligently.
e. Provide transparency to people who handle it well and either deny it to people
who don’t handle it well or remove those people from the organization.
f. Don’t share sensitive information with the organization’s enemies.
1.5 Meaningful relationships and meaningful work are mutually reinforcing,
especially when supported by radical truth and radical transparency.
2 Cultivate Meaningful Work and Meaningful Relationships
2.1 Be loyal to the common mission and not to anyone who is not operating
consistently with it.
2.2 Be crystal clear on what the deal is.
a. Make sure people give more consideration to others than they demand for
themselves.
b. Make sure that people understand the difference between fairness and
generosity.
c. Know where the line is and be on the far side of fair.
d. Pay for work.
2.3 Recognize that the size of the organization can pose a threat to meaningful
relationships.
2.4 Remember that most people will pretend to operate in your interest while
operating in their own.
2.5 Treasure honorable people who are capable and will treat you well even when
you’re not looking.
3 Create a Culture in Which It Is Okay to Make Mistakes and Unacceptable Not to
Learn from Them
3.1 Recognize that mistakes are a natural part of the evolutionary process.
a. Fail well.
b. Don’t feel bad about your mistakes or those of others. Love them!
3.2 Don’t worry about looking good—worry about achieving your goals.
a. Get over “blame” and “credit” and get on with “accurate” and “inaccurate.”
3.3 Observe the patterns of mistakes to see if they are products of weaknesses.
3.4 Remember to reflect when you experience pain.
a. Be self-reflective and make sure your people are self-reflective.
b. Know that nobody can see themselves objectively.
c. Teach and reinforce the merits of mistake-based learning.

3.5 Know what types of mistakes are acceptable and what types are
unacceptable, and don’t allow the people who work for you to make the
unacceptable ones.
4 Get and Stay in Sync
4.1 Recognize that conflicts are essential for great relationships because they are
how people determine whether their principles are aligned and resolve their
differences.
a. Spend lavishly on the time and energy you devote to getting in sync, because
it’s the best investment you can make.
4.2 Know how to get in sync and disagree well.
a. Surface areas of possible out-of-syncness.
b. Distinguish between idle complaints and complaints meant to lead to
improvement.
c. Remember that every story has another side.
4.3 Be open-minded and assertive at the same time.
a. Distinguish open-minded people from closed-minded people.
b. Don’t have anything to do with closed-minded people.
c. Watch out for people who think it’s embarrassing not to know.
d. Make sure that those in charge are open-minded about the questions and
comments of others.
e. Recognize that getting in sync is a two-way responsibility.
f. Worry more about substance than style.
g. Be reasonable and expect others to be reasonable.
h. Making suggestions and questioning are not the same as criticizing, so don’t
treat them as if they are.
4.4 If it is your meeting to run, manage the conversation.
a. Make it clear who is directing the meeting and whom it is meant to serve.
b. Be precise in what you’re talking about to avoid confusion.
c. Make clear what type of communication you are going to have in light of the
objectives and priorities.
d. Lead the discussion by being assertive and open-minded.
e. Navigate between the different levels of the conversation.
f. Watch out for “topic slip.”
g. Enforce the logic of conversations.
h. Be careful not to lose personal responsibility via group decision making.
i. Utilize the “two-minute rule” to avoid persistent interruptions.
j. Watch out for assertive “fast talkers.”
k. Achieve completion in conversations.
l. Leverage your communication.
4.5 Great collaboration feels like playing jazz.
a. 1+1=3.
b. 3 to 5 is more than 20.

4.6 When you have alignment, cherish it.
4.7 If you find you can’t reconcile major differences—especially in values—
consider whether the relationship is worth preserving.
5 Believability Weight Your Decision Making
5.1 Recognize that having an effective idea meritocracy requires that you
understand the merit of each person’s ideas.
a. If you can’t successfully do something, don’t think you can tell others how it
should be done.
b. Remember that everyone has opinions and they are often bad.
5.2 Find the most believable people possible who disagree with you and try to
understand their reasoning.
a. Think about people’s believability in order to assess the likelihood that their
opinions are good.
b. Remember that believable opinions are most likely to come from people 1)
who have successfully accomplished the thing in question at least three times,
and 2) who have great explanations of the cause-effect relationships that lead
them to their conclusions.
c. If someone hasn’t done something but has a theory that seems logical and can
be stress-tested, then by all means test it.
d. Don’t pay as much attention to people’s conclusions as to the reasoning that
led them to their conclusions.
e. Inexperienced people can have great ideas too, sometimes far better ones than
more experienced people.
f. Everyone should be up-front in expressing how confident they are in their
thoughts.
5.3 Think about whether you are playing the role of a teacher, a student, or a
peer and whether you should be teaching, asking questions, or debating.
a. It’s more important that the student understand the teacher than that the
teacher understand the student, though both are important.
b. Recognize that while everyone has the right and responsibility to try to make
sense of important things, they must do so with humility and radical open-
mindedness.
5.4 Understand how people came by their opinions.
a. If you ask someone a question, they will probably give you an answer, so
think through to whom you should address your questions.
b. Having everyone randomly probe everyone else is an unproductive waste of
time.
c. Beware of statements that begin with “I think that . . .”
d. Assess believability by systematically capturing people’s track records over
time.
5.5 Disagreeing must be done efficiently.

a. Know when to stop debating and move on to agreeing about what should be
done.
b. Use believability weighting as a tool rather than a substitute for decision
making by Responsible Parties.
c. Since you don’t have the time to thoroughly examine everyone’s thinking
yourself, choose your believable people wisely.
d. When you’re responsible for a decision, compare the believability-weighted
decision making of the crowd to what you believe.
5.6 Recognize that everyone has the right and responsibility to try to make sense
of important things.
a. Communications aimed at getting the best answer should involve the most
relevant people.
b. Communication aimed at educating or boosting cohesion should involve a
broader set of people than would be needed if the aim were just getting the
best answer.
c. Recognize that you don’t need to make judgments about everything.
5.7 Pay more attention to whether the decision-making system is fair than
whether you get your way.
6 Recognize How to Get Beyond Disagreements
6.1 Remember: Principles can’t be ignored by mutual agreement.
a. The same standards of behavior apply to everyone.
6.2 Make sure people don’t confuse the right to complain, give advice, and
openly debate with the right to make decisions.
a. When challenging a decision and/or a decision maker, consider the broader
context.
6.3 Don’t leave important conflicts unresolved.
a. Don’t let the little things divide you when your agreement on the big things
should bind you.
b. Don’t get stuck in disagreement—escalate or vote!
6.4 Once a decision is made, everyone should get behind it even though
individuals may still disagree.
a. See things from the higher level.
b. Never allow the idea meritocracy to slip into anarchy.
c. Don’t allow lynch mobs or mob rule.
6.5 Remember that if the idea meritocracy comes into conflict with the well-being
of the organization, it will inevitably suffer.
a. Declare “martial law” only in rare or extreme circumstances when the
principles need to be suspended.
b. Be wary of people who argue for the suspension of the idea meritocracy for
the “good of the organization.”
6.6 Recognize that if the people who have the power don’t want to operate by
principles, the principled way of operating will fail.

TO GET THE PEOPLE RIGHT . . .
7 Remember That the WHO Is More Important than the WHAT
7.1 Recognize that the most important decision for you to make is who you
choose as your Responsible Parties.
a. Understand that the most important RPs are those responsible for the goals,
outcomes, and machines at the highest levels.
7.2 Know that the ultimate Responsible Party will be the person who bears the
consequences of what is done.
a. Make sure that everyone has someone they report to.
7.3 Remember the force behind the thing.
8 Hire Right, Because the Penalties for Hiring Wrong Are Huge
8.1 Match the person to the design.
a. Think through which values, abilities, and skills you are looking for (in that
order).
b. Make finding the right people systematic and scientific.
c. Hear the click: Find the right fit between the role and the person.
d. Look for people who sparkle, not just “any ol’ one of those.”
e. Don’t use your pull to get someone a job.
8.2 Remember that people are built very differently and that different ways of
seeing and thinking make people suitable for different jobs.
a. Understand how to use and interpret personality assessments.
b. Remember that people tend to pick people like themselves, so choose
interviewers who can identify what you are looking for.
c. Look for people who are willing to look at themselves objectively.
d. Remember that people typically don’t change all that much.
8.3 Think of your teams the way that sports managers do: No one person
possesses everything required to produce success, yet everyone must excel.
8.4 Pay attention to people’s track records.
a. Check references.
b. Recognize that performance in school doesn’t tell you much about whether a
person has the values and abilities you are looking for.
c. While it’s best to have great conceptual thinkers, understand that great
experience and a great track record also count for a lot.
d. Beware of the impractical idealist.
e. Don’t assume that a person who has been successful elsewhere will be
successful in the job you’re giving them.
f. Make sure your people have character and are capable.
8.5 Don’t hire people just to fit the first job they will do; hire people you want to
share your life with.
a. Look for people who have lots of great questions.

b. Show candidates your warts.
c. Play jazz with people with whom you are compatible but who will also
challenge you.
8.6 When considering compensation, provide both stability and opportunity.
a. Pay for the person, not the job.
b. Have performance metrics tied at least loosely to compensation.
c. Pay north of fair.
d. Focus more on making the pie bigger than on exactly how to slice it so that
you or anyone else gets the biggest piece.
8.7 Remember that in great partnerships, consideration and generosity are more
important than money.
a. Be generous and expect generosity from others.
8.8 Great people are hard to find so make sure you think about how to keep
them.
9 Constantly Train, Test, Evaluate, and Sort People
9.1 Understand that you and the people you manage will go through a process of
personal evolution.
a. Recognize that personal evolution should be relatively rapid and a natural
consequence of discovering one’s strengths and weaknesses; as a result,
career paths are not planned at the outset.
b. Understand that training guides the process of personal evolution.
c. Teach your people to fish rather than give them fish, even if that means letting
them make some mistakes.
d. Recognize that experience creates internalized learning that book learning
can’t replace.
9.2 Provide constant feedback.
9.3 Evaluate accurately, not kindly.
a. In the end, accuracy and kindness are the same thing.
b. Put your compliments and criticisms in perspective.
c. Think about accuracy, not implications.
d. Make accurate assessments.
e. Learn from success as well as from failure.
f. Know that most everyone thinks that what they did, and what they are doing,
is much more important than it really is.
9.4 Recognize that tough love is both the hardest and the most important type of
love to give (because it is so rarely welcomed).
a. Recognize that while most people prefer compliments, accurate criticism is
more valuable.
9.5 Don’t hide your observations about people.
a. Build your synthesis from the specifics up.
b. Squeeze the dots.
c. Don’t oversqueeze a dot.

d. Use evaluation tools such as performance surveys, metrics, and formal
reviews to document all aspects of a person’s performance.
9.6 Make the process of learning what someone is like open, evolutionary, and
iterative.
a. Make your metrics clear and impartial.
b. Encourage people to be objectively reflective about their performance.
c. Look at the whole picture.
d. For performance reviews, start from specific cases, look for patterns, and get
in sync with the person being reviewed by looking at the evidence together.
e. Remember that when it comes to assessing people, the two biggest mistakes
you can make are being overconfident in your assessment and failing to get in
sync on it.
f. Get in sync on assessments in a nonhierarchical way.
g. Learn about your people and have them learn about you through frank
conversations about mistakes and their root causes.
h. Understand that making sure people are doing a good job doesn’t require
watching everything that everybody is doing at all times.
i. Recognize that change is difficult.
j. Help people through the pain that comes with exploring their weaknesses.
9.7 Knowing how people operate and being able to judge whether that way of
operating will lead to good results is more important than knowing what
they did.
a. If someone is doing their job poorly, consider whether it is due to inadequate
learning or inadequate ability.
b. Training and testing a poor performer to see if he or she can acquire the
required skills without simultaneously trying to assess their abilities is a
common mistake.
9.8 Recognize that when you are really in sync with someone about their
weaknesses, the weaknesses are probably true.
a. When judging people, remember that you don’t have to get to the point of
“beyond a shadow of a doubt.”
b. It should take you no more than a year to learn what a person is like and
whether they are a click for their job.
c. Continue assessing people throughout their tenure.
d. Evaluate employees with the same rigor as you evaluate job candidates.
9.9 Train, guardrail, or remove people; don’t rehabilitate them.
a. Don’t collect people.
b. Be willing to “shoot the people you love.”
c. When someone is “without a box,” consider whether there is an open box that
would be a better fit or whether you need to get them out of the company.
d. Be cautious about allowing people to step back to another role after failing.
9.10 Remember that the goal of a transfer is the best, highest use of the person in a way
that benefits the community as a whole.

a. Have people “complete their swings” before moving on to new roles.
9.11 Don’t lower the bar.
TO BUILD AND EVOLVE YOUR
MACHINE . . .
10 Manage as Someone Operating a Machine to Achieve a Goal
10.1 Look down on your machine and yourself within it from the higher level.
a. Constantly compare your outcomes to your goals.
b. Understand that a great manager is essentially an organizational engineer.
c. Build great metrics.
d. Beware of paying too much attention to what is coming at you and not enough
attention to your machine.
e. Don’t get distracted by shiny objects.
10.2 Remember that for every case you deal with, your approach should have two
purposes: 1) to move you closer to your goal, and 2) to train and test your
machine (i.e., your people and your design).
a. Everything is a case study.
b. When a problem occurs, conduct the discussion at two levels: 1) the machine
level (why that outcome was produced) and 2) the case-at-hand level (what to
do about it).
c. When making rules, explain the principles behind them.
d. Your policies should be natural extensions of your principles.
e. While good principles and policies almost always provide good guidance,
remember that there are exceptions to every rule.
10.3 Understand the differences between managing, micromanaging, and not
managing.
a. Managers must make sure that what they are responsible for works well.
b. Managing the people who report to you should feel like skiing together.
c. An excellent skier is probably going to be a better ski coach than a novice skier.
d. You should be able to delegate the details.
10.4 Know what your people are like and what makes them tick, because your
people are your most important resource.
a. Regularly take the temperature of each person who is important to you and to
the organization.
b. Learn how much confidence to have in your people—don’t assume it.
c. Vary your involvement based on your confidence.
10.5 Clearly assign responsibilities.
a. Remember who has what responsibilities.
b. Watch out for “job slip.”
10.6 Probe deep and hard to learn what you can expect from your machine.

a. Get a threshold level of understanding.
b. Avoid staying too distant.
c. Use daily updates as a tool for staying on top of what your people are doing and
thinking.
d. Probe so you know whether problems are likely to occur before they actually
do.
e. Probe to the level below the people who report to you.
f. Have the people who report to the people who report to you feel free to escalate
their problems to you.
g. Don’t assume that people’s answers are correct.
h. Train your ear.
i. Make your probing transparent rather than private.
j. Welcome probing.
k. Remember that people who see things and think one way often have difficulty
communicating with and relating to people who see things and think another
way.
l. Pull all suspicious threads.
m. Recognize that there are many ways to skin a cat.
10.7 Think like an owner, and expect the people you work with to do the same.
a. Going on vacation doesn’t mean one can neglect one’s responsibilities.
b. Force yourself and the people who work for you to do difficult things.
10.8 Recognize and deal with key-man risk.
10.9 Don’t treat everyone the same—treat them appropriately.
a. Don’t let yourself get squeezed.
b. Care about the people who work for you.
10.10 Know that great leadership is generally not what it’s made out to be.
a. Be weak and strong at the same time.
b. Don’t worry about whether or not your people like you and don’t look to them
to tell you what you should do.
c. Don’t give orders and try to be followed; try to be understood and to understand
others by getting in sync.
10.11 Hold yourself and your people accountable and appreciate them for holding
you accountable.
a. If you’ve agreed with someone that something is supposed to go a certain way,
make sure it goes that way—unless you get in sync about doing it differently.
b. Distinguish between a failure in which someone broke their “contract” and a
failure in which there was no contract to begin with.
c. Avoid getting sucked down.
d. Watch out for people who confuse goals and tasks, because if they can’t make
that distinction, you can’t trust them with responsibilities.
e. Watch out for the unfocused and unproductive “theoretical should.”
10.12 Communicate the plan clearly and have clear metrics conveying whether you
are progressing according to it.

a. Put things in perspective by going back before going forward.
10.13 Escalate when you can’t adequately handle your responsibilities and make sure
that the people who work for you are proactive about doing the same.
11 Perceive and Don’t Tolerate Problems
11.1 If you’re not worried, you need to worry—and if you’re worried, you don’t
need to worry.
11.2 Design and oversee a machine to perceive whether things are good enough or
not good enough, or do it yourself.
a. Assign people the job of perceiving problems, give them time to investigate,
and make sure they have independent reporting lines so that they can convey
problems without any fear of recrimination.
b. Watch out for the “Frog in the Boiling Water Syndrome.”
c. Beware of group-think: The fact that no one seems concerned doesn’t mean
nothing is wrong.
d. To perceive problems, compare how the outcomes are lining up with your
goals.
e. “Taste the soup.”
f. Have as many eyes looking for problems as possible.
g. “Pop the cork.”
h. Realize that the people closest to certain jobs probably know them best.
11.3 Be very specific about problems; don’t start with generalizations.
a. Avoid the anonymous “we” and “they,” because they mask personal
responsibility.
11.4 Don’t be afraid to fix the difficult things.
a. Understand that problems with good, planned solutions in place are completely
different from those without such solutions.
b. Think of the problems you perceive in a machinelike way.
12 Diagnose Problems to Get at Their Root Causes
12.1 To diagnose well, ask the following questions: 1. Is the outcome good or bad?
2. Who is responsible for the outcome? 3. If the outcome is bad, is the
Responsible Party incapable and/or is the design bad?
a. Ask yourself: “Who should do what differently?”
b. Identify at which step in the 5-Step Process the failure occurred.
c. Identify the principles that were violated.
d. Avoid Monday morning quarterbacking.
e. Don’t confuse the quality of someone’s circumstances with the quality of their
approach to dealing with the circumstances.
f. Identifying the fact that someone else doesn’t know what to do doesn’t mean
that you know what to do.
g. Remember that a root cause is not an action but a reason.

h. To distinguish between a capacity issue and a capability issue, imagine how the
person would perform at that particular function if they had ample capacity.
i. Keep in mind that managers usually fail or fall short of their goals for one (or
more) of five reasons.
12.2 Maintain an emerging synthesis by diagnosing continuously.
12.3 Keep in mind that diagnoses should produce outcomes.
a. Remember that if you have the same people doing the same things, you should
expect the same results.
12.4 Use the following “drill-down” technique to gain an 80/20 understanding of a
department or sub-department that is having problems.
12.5 Understand that diagnosis is foundational to both progress and quality
relationships.
13 Design Improvements to Your Machine to Get Around Your Problems
13.1 Build your machine.
13.2 Systemize your principles and how they will be implemented.
a. Create great decision-making machines by thinking through the criteria you are
using to make decisions while you are making them.
13.3 Remember that a good plan should resemble a movie script.
a. Put yourself in the position of pain for a while so that you gain a richer
understanding of what you’re designing for.
b. Visualize alternative machines and their outcomes, and then choose.
c. Consider second- and third-order consequences, not just first-order ones.
d. Use standing meetings to help your organization run like a Swiss clock.
e. Remember that a good machine takes into account the fact that people are
imperfect.
13.4 Recognize that design is an iterative process. Between a bad “now” and a good
“then” is a “working through it” period.
a. Understand the power of the “cleansing storm.”
13.5 Build the organization around goals rather than tasks.
a. Build your organization from the top down.
b. Remember that everyone must be overseen by a believable person who has high
standards.
c. Make sure the people at the top of each pyramid have the skills and focus to
manage their direct reports and a deep understanding of their jobs.
d. In designing your organization, remember that the 5-Step Process is the path to
success and that different people are good at different steps.
e. Don’t build the organization to fit the people.
f. Keep scale in mind.
g. Organize departments and sub-departments around the most logical groupings
based on “gravitational pull.”
h. Make departments as self-sufficient as possible so that they have control over
the resources they need to achieve their goals.

i. Ensure that the ratios of senior managers to junior managers and of junior
managers to their reports are limited to preserve quality communication and
mutual understanding.
j. Consider succession and training in your design.
k. Don’t just pay attention to your job; pay attention to how your job will be done
if you are no longer around.
l. Use “double-do” rather than “double-check” to make sure mission-critical tasks
are done correctly.
m. Use consultants wisely and watch out for consultant addiction.
13.6 Create an organizational chart to look like a pyramid, with straight lines down
that don’t cross.
a. Involve the person who is the point of the pyramid when encountering cross-
departmental or cross-sub-departmental issues.
b. Don’t do work for people in another department or grab people from another
department to do work for you unless you speak to the person responsible for
overseeing the other department.
c. Watch out for “department slip.”
13.7 Create guardrails when needed—and remember it’s better not to guardrail at
all.
a. Don’t expect people to recognize and compensate for their own blind spots.
b. Consider the clover-leaf design.
13.8 Keep your strategic vision the same while making appropriate tactical changes
as circumstances dictate.
a. Don’t put the expedient ahead of the strategic.
b. Think about both the big picture and the granular details, and understand the
connections between them.
13.9 Have good controls so that you are not exposed to the dishonesty of others.
a. Investigate and let people know you are going to investigate.
b. Remember that there is no sense in having laws unless you have policemen
(auditors).
c. Beware of rubber-stamping.
d. Recognize that people who make purchases on your behalf probably will not
spend your money wisely.
e. Use “public hangings” to deter bad behavior.
13.10 Have the clearest possible reporting lines and delineations of responsibilities.
a. Assign responsibilities based on workflow design and people’s abilities, not job
titles.
b. Constantly think about how to produce leverage.
c. Recognize that it is far better to find a few smart people and give them the best
technology than to have a greater number of ordinary people who are less well
equipped.
d. Use leveragers.

13.11 Remember that almost everything will take more time and cost more money
than you expect.
14 Do What You Set Out to Do
14.1 Work for goals that you and your organization are excited about and think
about how your tasks connect to those goals.
a. Be coordinated and consistent in motivating others.
b. Don’t act before thinking. Take the time to come up with a game plan.
c. Look for creative, cut-through solutions.
14.2 Recognize that everyone has too much to do.
a. Don’t get frustrated.
14.3 Use checklists.
a. Don’t confuse checklists with personal responsibility.
14.4 Allow time for rest and renovation.
14.5 Ring the bell.
15 Use Tools and Protocols to Shape How Work Is Done
15.1 Having systemized principles embedded in tools is especially valuable for an
idea meritocracy.
a. To produce real behavioral change, understand that there must be internalized
or habitualized learning.
b. Use tools to collect data and process it into conclusions and actions.
c. Foster an environment of confidence and fairness by having clearly-stated
principles that are implemented in tools and protocols so that the conclusions
reached can be assessed by tracking the logic and data behind them.
16 And for Heaven’s Sake, Don’t Overlook Governance!
16.1 To be successful, all organizations must have checks and balances.
a. Even in an idea meritocracy, merit cannot be the only determining factor in
assigning responsibility and authority.
b. Make sure that no one is more powerful than the system or so important that
they are irreplaceable.
c. Beware of fiefdoms.
d. Make clear that the organization’s structure and rules are designed to ensure
that its checks-and-balances system functions well.
e. Make sure reporting lines are clear.
f. Make sure decision rights are clear.
g. Make sure that the people doing the assessing 1) have the time to be fully
informed about how the person they are checking on is doing, 2) have the
ability to make the assessments, and 3) are not in a conflict of interest that
stands in the way of carrying out oversight effectively.
h. Recognize that decision makers must have access to the information necessary
to make decisions and must be trustworthy enough to handle that information

safely.

16.2 Remember that in an idea meritocracy a single CEO is not as good as a great

group of leaders.

16.3 No governance system of principles, rules, and checks and balances can

substitute for a great partnership.

For any group or organization to

function well, its work principles

must be aligned with its members’

life principles.

I don’t mean that they must be aligned on everything, but I do mean that they

have to be aligned on the most important things, like the mission they’re on

and how they will be with each other.

If people in an organization feel that alignment, they will treasure their

relationships and work together harmoniously; its culture will permeate

everything they do. If they don’t, they will work for different, often

conflicting, goals and will be confused about how they should be with each

other. For that reason, it pays for all organizations—companies, governments,

foundations, schools, hospitals, and so on—to spell out their principles and

values clearly and explicitly and to operate by them consistently.

Those principles and values aren’t vague slogans, like “the customer

always comes first” or “we should strive to be the best in our industry,” but a

set of concrete directives anyone can understand, get aligned on, and carry

out. As we shift our attention from Life Principles to Work Principles, I will

explain how we went about achieving these alignments at Bridgewater and

how that affected our results. But first, I want to explain how I think about

organizations.

• An organization is a machine consisting of two major

parts: culture and people.

Each influences the other, because the people who make up an organization

determine the kind of culture it has, and the culture of the organization

determines the kinds of people who fit in.

a. A great organization has both great people and a great culture. Companies that

get progressively better over time have both. Nothing is more important or

more difficult than to get the culture and people right.

b. Great people have both great character and great capabilities. By great

character, I mean they are radically truthful, radically transparent, and deeply

committed to the mission of the organization. By great capabilities, I mean

they have the abilities and skills to do their jobs excellently. People who have

one without the other are dangerous and should be removed from the

organization. People who have both are rare and should be treasured.

c. Great cultures bring problems and disagreements to the surface and solve them

well, and they love imagining and building great things that haven’t been built before.

Doing that sustains their evolution. In our case, we do that by having an idea

meritocracy that strives for meaningful work and meaningful relationships

through radical truth and radical transparency. By meaningful work, I mean

work that people are excited to get their heads into, and by meaningful

relationships I mean those in which there is genuine caring for each other

(like an extended family). I find that these reinforce each other and that being

radically truthful and radically transparent with each other makes both the

work and the relationships go better.

By constantly looking down on the machine, its managers can objectively

compare the outcomes it produces with their goals. If those outcomes are

consistent with those goals, then the machine is working effectively; if the

outcomes are inconsistent with the goals, then something is wrong with either

the design of the machine or the people who are a part of it and the problem

needs to be diagnosed so the machine can be modified. As laid out in Chapter

Two of Life Principles, this ideally happens in a 5-Step Process: 1) having

clear goals, 2) identifying the problems preventing the goals from being

achieved, 3) diagnosing what parts of the machine (i.e., which people or

which designs) are not working well, 4) designing changes, and 5) doing

what is needed. This is the fastest and most efficient way that an organization

improves.

I call this process of converting problems into progress “looping,” and

how it happens through time is visualized in the diagrams to the right. In the

first, a problem occurs that takes you off track from your goals and makes

things worse than you planned.

If you identify the decline, diagnose the problems that caused it so as to

get at their root causes, come up with new designs, and then push them

through, the trajectory will loop back on itself and continue its upward

ascent, like in the second diagram.

If you don’t identify the problem, design a suboptimal solution, or fail to

push it through effectively, the decline will continue as shown in the diagram

at the bottom.

A manager’s ability to recognize when outcomes are inconsistent with

goals and then modify designs and assemble people to rectify them makes all

the difference in the world. The more often and more effectively a manager

does this, the steeper the upward trajectory.

As I explained in Life Principles, this is what I believe evolution looks like

for all organisms and organizations. Having a culture and people that will

evolve in this way is critical because the world changes quickly and in ways

that can’t possibly be anticipated. I’m sure you can think of a number of

companies that failed to identify and address their problems on time and

ended up in a terminal decline (see: BlackBerry and Palm) and a rare few that

have consistently looped well. Most don’t. For example, only six of the

companies that forty years ago made up the Dow Jones 30, which is about

when Bridgewater got started, are still in the Dow 30 today. Many of them—

American Can, American Tobacco, Bethlehem Steel, General Foods, Inco,

F. W. Woolworth—don’t even exist; some (Sears Roebuck, Johns-Manville,

Eastman Kodak) are so different as to be almost unrecognizable. And many

of the standouts on the list today—Apple, Cisco—were yet to be founded.

The rare few that have been able to evolve well over the decades have

been successful at that evolutionary/looping process, which also is the

process that has made Bridgewater progressively more successful for forty

years. That is the process I want to pass along to you.

As I mentioned earlier, nothing is more important or more difficult than to

get the culture and the people right. Whatever successes we’ve had at

Bridgewater were the result of doing that well—and whatever failures were

due to our not doing it adequately. That might seem odd because, as a global

macroeconomic investor, one might think that, above all else, I had to get the

economics and investments right, which is true. But to do that, I needed to get

the people and culture right first. And, to inspire me to do what I did, I

needed to have meaningful work and meaningful relationships.

As the entrepreneur/builder of Bridgewater, I naturally shaped the

organization to be consistent with my values and principles. I went after what

I wanted most, in the way that seemed most natural to me with the people I

chose to be with, and we and Bridgewater evolved together.

If you had asked me what my objective was when I started out, I would’ve

said it was to have fun working with people I like. Work was a game I played

with passion and I wanted to have a blast playing it with people I enjoyed and

respected. I started Bridgewater out of my apartment with a pal I played

rugby with who had no experience in the markets and a friend we hired as our

assistant. I certainly wasn’t thinking about management at the time.

Management seemed to me like something people in gray suits with slide

presentations did. I never set out to manage, let alone to have principles about

work and management.

From reading Life Principles, you know that I liked to imagine and build

out new, practical concepts that never existed before. I especially loved doing

these things with people who were on the same mission with me. I treasured

thoughtful disagreement with them as a way of learning and raising our odds

of making good decisions, and I wanted all the people I worked with to be

my “partners” rather than my “employees.” In a nutshell, I was looking for

meaningful work and meaningful relationships. I quickly learned that the best

way to do that was to have great partnerships with great people.

To me, great partnerships come from sharing common values and

interests, having similar approaches to pursuing them, and being reasonable

with, and having consideration for, each other. At the same time, partners

must be willing to hold each other to high standards and work through their

disagreements. The main test of a great partnership is not whether the

partners ever disagree—people in all healthy relationships disagree—but

whether they can bring their disagreements to the surface and get through

them well. Having clear processes for resolving disagreements efficiently and

clearly is essential for business partnerships, marriages, and all other forms of

partnership.

My wanting these things attracted others who wanted the same things,

which drove how we shaped Bridgewater together.

When there were five of

us it was totally different than when there were fifty of us, which was totally

different than it was when we were five hundred, a thousand, and so on. As

we grew, most everything changed beyond recognition, except for our core

values and principles.

When Bridgewater was still a small company, the principles by which we

operated were more implicit than explicit. But as more and more new people

came in, I couldn’t take for granted that they would understand and preserve

them. I realized that I needed to write our principles out explicitly and explain

the logic behind them. I remember the precise moment when this shift

occurred—it was when the number of people at Bridgewater passed sixty-

seven. Up until then, I had personally chosen each employee’s holiday gift

and written them a lengthy personalized card, but trying to do it that year

broke my back. From that point on, an increasing number of people came in

who didn’t work closely with me, so I couldn’t assume they would

understand where I was coming from or what I was striving to create, which

was an idea meritocracy built on tough love.

• Tough love is effective for achieving both great work

and great relationships.

To give you an idea of what I mean by tough love, think of Vince Lombardi,

who for me personified it. From when I was ten years old until I was

eighteen, Lombardi was head coach of the Green Bay Packers. With limited

resources, he led his team to five NFL championships. He won two NFL

Coach of the Year awards and many still call him the best coach of all time.

Lombardi loved his players and he pushed them to be great. I admired, and

still admire, how uncompromising his standards were. His players, their fans,

and he himself all benefited from his approach. I wish Lombardi had written

out his principles for me to read.

a. In order to be great, one can’t compromise the uncompromisable. Yet I see

people doing it all the time, usually to avoid making others or themselves feel

uncomfortable, which is not just backward but counterproductive. Putting

comfort ahead of success produces worse results for everyone. I both loved

the people I worked with and pushed them to be great, and I expected them to

do the same with me.

From the very beginning, I felt that the people I worked with at

Bridgewater were a part of my extended family. When they or members of

their families got sick, I put them in touch with my personal doctor to make

sure that they were well taken care of. I invited all of them to stay at my

house in Vermont on weekends and loved it when they took me up on it. I

celebrated their marriages and the births of their children with them and

mourned the losses of their loved ones. But to be clear, this was no lovefest.

We were tough on each other too, so we could all be as great as we could be.

I learned that the more caring we gave each other, the tougher we could be on

each other, and the tougher we were on each other, the better we performed

and the more rewards there were for us to share. This cycle was self-

reinforcing. I found that operating this way made the lows less low and the

highs higher. It even made the bad times better than the good ones in some

important ways.

Think about some of your toughest experiences in life. I bet it is as true for

you as it has been for me that going through them with people you cared

about, who cared about you, and who were working as hard as you were for

the same mission, was incredibly rewarding. As hard as they were, we look

back on some of these challenging times as our finest moments. For most

people, being part of a great community on a shared mission is even more

rewarding than money. Numerous studies have shown there is little to no

correlation between one’s happiness and the amount of money one

accumulates, yet there is a strong correlation between one’s happiness and

the quality of one’s relationships.

I laid this out in a memo to Bridgewater in 1996:

Bridgewater is not about plodding along at some kind of moderate

standard, it is about working like hell to achieve a standard that is

extraordinarily high, and then getting the satisfaction that comes along

with that sort of super-achievement.

Our overriding objective is excellence, or more precisely, constant

improvement, a superb and constantly improving company in all respects.

Conflict in the pursuit of excellence is a terrific thing. There should be

no hierarchy based on age or seniority. Power should lie in the

reasoning, not the position, of the individual. The best ideas win no

matter who they come from.

Criticism (by oneself and by others) is an essential ingredient in the

improvement process, yet, if handled incorrectly, can be destructive. It

should be handled objectively. There should be no hierarchy in the giving

or receiving of criticism.

Teamwork and team spirit are essential, including intolerance of

substandard performance. This is referring to 1) one’s recognition of the

responsibilities one has to help the team achieve its common goals and 2)

the willingness to help others (work within a group) toward these

common goals. Our fates are intertwined. One should know that others

can be relied upon to help. As a corollary, substandard performance

cannot be tolerated anywhere because it would hurt everyone.

Long-term relationships are both a) intrinsically gratifying and

b)efficient, and should be intentionally built. Turnover requires re-

training and therefore creates setbacks.

Money is a byproduct of excellence, not a goal. Our overriding

objective is excellence and constant improvement at Bridgewater. To be

clear, it is not to make lots of money. The natural extension of this is not

that you should be happy with little money. On the contrary—you should

expect to make a lot. If we operate consistently with this philosophy we

should be productive and the company should do well financially. There

is comparatively little age- and seniority-based hierarchy.

Each person at Bridgewater should act like an owner, responsible for

operating in this way and for holding others accountable to operate in

this way.

• A believability-weighted idea meritocracy is the best

system for making effective decisions.

Unlike Lombardi, whose success depended on having his players follow his

instructions, I needed my players to be independent thinkers who could bang

around their different points of view and reach better conclusions than any

one of us could come up with on our own. I needed to create an environment

in which everyone had the right and the responsibility to make sense of things

for themselves and to fight openly for what they think is best—and where the

best thinking won out. I needed a real idea meritocracy, not some theoretical

version of one. That’s because an idea meritocracy—i.e., a system that brings

together smart, independent thinkers and has them productively disagree to

come up with the best possible collective thinking and resolve their

disagreements in a believability-weighted way—will outperform any other

decision-making system.

Our idea-meritocratic system evolved over the decades. At first, we just

argued like hell with each other about what was best and by thrashing

through our disagreements came up with better paths than if we had made our

decisions individually. But as Bridgewater grew and our range of

disagreements and needs to resolve them changed, we became more explicit

in how this idea meritocracy would work. We needed a system that could

both effectively weigh the believability of different people to come to the best

decisions and do that in a way that was so obviously fair everyone would

recognize it as such. I knew that without such a system, we would lose both

the best thinking and the best thinkers, and I’d be stuck with either kiss-asses

or subversives who kept their disagreements and hidden resentments to

themselves.

For this all to work, I believed and still believe that we need to be radically

truthful and radically transparent with each other.

RADICAL TRUTH AND RADICAL

TRANSPARENCY

By radical truth, I mean not filtering one’s thoughts and one’s questions,

especially the critical ones. If we don’t talk openly about our issues and have

paths for working through them, we won’t have partners who collectively

own our outcomes.

By radical transparency, I mean giving most everyone the ability to see

most everything. To give people anything less than total transparency would

make them vulnerable to others’ spin and deny them the ability to figure

things out for themselves. Radical transparency reduces harmful office

politics and the risks of bad behavior because bad behavior is more likely to

take place behind closed doors than out in the open.

Some people have called this way of operating radical

straightforwardness.

I knew that if radical truth and radical transparency didn’t apply across the

board, we would develop two classes of people at the company—those with

power who are in the know, and those who aren’t—so I pushed them both to

their limits. To me, a pervasive Idea Meritocracy = Radical Truth +

Radical Transparency + Believability-Weighted Decision Making.

From a small group of people arguing informally about what’s true and

what to do about it, we developed approaches, technologies, and tools over

the last forty years that have taken us to a whole other level, which has been

eye-opening and invaluable in ways that you can read about in the tools

chapter at the end of this book. We have always been unwavering in

providing this environment, and we let the people who didn’t like it self-

select themselves out of the company.

By being radically truthful and radically transparent, we could see that we

all have terribly incomplete and/or distorted perspectives. This isn’t unique to

Bridgewater—you would recognize the same thing if you could see into the

heads of the people around you. As explained in Understand That People Are

Wired Very Differently, people tend to see the same situations in

dramatically different ways, depending on how their brains are wired.

Seeing this will help you evolve. At first most people remain stuck in their

own heads, stubbornly clinging to the idea that their views are best and that

something is wrong with other people who don’t see things their way. But

when they repeatedly face the questions “How do you know that you’re not

the wrong one?” and “What process would you use to draw upon these

different perspectives to make the best decisions?” they are forced to confront

their own believability and see things through others’ eyes as well as their

own. This shift in perspective is what produces great collective decision

making. Ideally, this takes place in an “open-source” way, with the best ideas

flowing freely, living, dying, and producing rapid evolution based on their

merits.

Most people initially find this process very uncomfortable. While most

appreciate it intellectually, they typically are challenged by it emotionally

because it requires them to separate themselves from their ego’s attachment

to being right and try to see what they have a hard time seeing. A small

minority get it and love it from the start, a slightly larger minority can’t stand

it and leave the company, and the majority stick with it, get better at it with

time, and eventually wouldn’t want to operate any other way.

IDEA

MERITOCRACY

RADICAL

TRUTH

RADICAL

TRANSPARENCY

BELIEVABILITY-

WEIGHTED

DECISION

MAKING

While operating this way might sound difficult and inefficient, it is

actually extremely efficient. In fact, it is much harder and much less efficient

to work in an organization in which most people don’t know what their

colleagues are really thinking. Also, when people can’t be totally open, they

can’t be themselves. As Harvard developmental psychologist Bob Kegan,

who has studied Bridgewater, likes to say, in most companies people are

doing two jobs: their actual job and the job of managing others’ impressions

of how they’re doing their job. For us, that’s terrible. We’ve found that

bringing everything to the surface 1) removes the need to try to look good

and 2) eliminates time required to guess what people are thinking. In doing

so, it creates more meaningful work and more meaningful relationships.

Here are the forces behind Bridgewater’s self-reinforcing evolutionary

spiral:

1. We went from one independent thinker who wanted to achieve

audacious goals to a group of independent thinkers who wanted to

achieve audacious goals.

2. To enable these independent thinkers to have effective collective

decision making, we created an idea meritocracy based on principles

that ensured we would be radically honest and transparent with each

other, have thoughtful disagreements, and have idea-meritocratic ways

of getting past our disagreements to make decisions.

3. We recorded these decision-making principles on paper and later

encoded them into computers and made our decisions based on them.

4. This produced our successes and failures, which produced more

learnings, which were written into more principles that were systemized

and acted upon.

5. This process resulted in excellent work and excellent relationships that

led us to having well-rewarded and happy employees and clients.

6. That led us to be able to bring in more audacious independent thinkers

with more audacious goals to strengthen this self-reinforcing upward

spiral.

We did that over and over again, which produced the evolutionary looping

behind Bridgewater’s forty-plus years of success. It’s shown in the diagram

on the facing page.

This really works! You don’t have to take my word for it. There are two

ways you can evaluate the likelihood that this approach and the principles

that follow from it are as powerful as I believe they are. You can 1) look at

the results they produced and 2) look at the logic behind them.

As for the results, like Lombardi’s and the Packers’, our track record

speaks for itself. We consistently got better over forty years, going from my

two-bedroom apartment to become the fifth most impor-tant private company

in the U.S., according to Fortune, and the world’s largest hedge fund, making

more total money for our clients than any other hedge fund in history. We

have received over one hundred industry awards and I’ve earned three

lifetime achievement awards—not to mention remarkable financial and

psychological rewards, and most importantly, amazing relationships.

But even more important than these results is the underlying cause-effect

logic behind these principles, which came before the results. Over forty years

ago, this way of being was a controversial, untested theory that nevertheless

seemed logical to me. I will explain this logic to you in the pages that follow.

That way, you can assess it for yourself.

There’s no doubt that our approach is very different. Some people have

even described Bridgewater as a cult. The truth is that Bridgewater succeeds

because it is the opposite of a cult. The essential difference between a culture

of people with shared values (which is a great thing) and a cult (which is a

terrible thing) is the extent to which there is independent thinking. Cults

demand unquestioning obedience. Thinking for yourself and challenging each

other’s ideas is anti-cult behavior, and that is the essence of what we do at

Bridgewater.

WHO’S CRAZY?

Some people say that our approach is crazy, but think about it: Which

approach do you think is crazy and which one is sensible?

• One where people are truthful and transparent, or one in which most

people keep their real thoughts hidden?

• One where problems, mistakes, weaknesses, and disagreements are

brought to the surface and thoughtfully discussed, or one in which they

are not forthrightly brought to the surface and discussed?

• One in which the right to criticize is nonhierarchical, or one in which it

primarily comes from the top down?

• One in which objective pictures of what people are like are derived

through lots of data and broad triangulations of people, or one in which

evaluations of people are more arbitrary?

• One in which the organization pursues very high standards for achieving

both meaningful work and meaningful relationships, or one in which

work quality and relationship quality are not equally valued and/or the

standards aren’t as high?

Which kind of organization do you think will enable better development

for the people who work there, foster deeper relationships between them, and

produce better results? Which approach would you prefer to see the leaders

and organizations that you deal with follow? Which way of being would you

prefer the people who run our government to follow?

My bet is that after reading this book, you will agree that our way of

operating is far more sensible than conventional ways of operating. But

remember that my most fundamental principle is that you have to think for

yourself.

WHY I WROTE THIS BOOK AND HOW YOU CAN

GET THE MOST OUT OF IT

If you are inside Bridgewater, I am passing these principles on in my own

words so that you can see the dream and the approach through my eyes.

Bridgewater will evolve from where it is now based on what you and others

in the next generation of leadership want and how you go about getting it.

This book is intended to help you. How you use it is up to you. Whether or

not this culture continues is up to you and those who succeed me in the

leadership role. It is my responsibility to not be attached to Bridgewater being

the way I would want it to be. It is most important that you and others who

succeed me make your own independent choices. Like a parent with adult

children, I want you all to be strong, independent thinkers who will do well

without me. I have done my best to bring you to this point; now is the time

for you to step up and for me to fade away.

If you are outside Bridgewater and thinking about how these principles

might apply to your organization, this book is meant to prompt your thinking,

not to give you an exact formula to follow. You don’t have to adopt all or any

of these principles, though I do recommend that you consider them all. Many

people who run other organizations have adopted some of these principles,

modified others, and rejected many. Whatever you want to do with them is

fine with me. These principles provide a framework you can modify to suit

your needs. Maybe you will pursue the same goal and maybe you won’t;

chances are that, in either case, you will collect some valuable stuff. If you

share my goal of having your organization be a real idea meritocracy, I

believe this book will be invaluable for you because I’m told that no

organization has thought through or pushed the concepts of how to make a

real idea meritocracy as far as Bridgewater. If doing that is important to you

and you pursue it with unwavering determination you will encounter your

own barriers, you will find your own ways around them, and you will get

there, even if imperfectly.

While these principles are good general rules, it’s important to remember

that every rule has exceptions and that no set of rules can ever substitute for

common sense. Think of these principles as being like a GPS. A GPS helps

you get where you’re going, but if you follow it blindly off a bridge—well,

that would be your fault, not the GPS’s. And just as a GPS that gives bad

directions can be fixed by updating its software, it’s important to raise and

discuss exceptions to the principles as they occur so they can evolve and

improve over time.

No matter what path you choose to follow, your organization is a machine

made up of culture and people that will interact to produce outcomes, and

those outcomes will provide feedback about how well your organization is

working. Learning from this feedback should lead you to modify the culture

and the people so your organizational machine improves.

This dynamic is so important that I’ve organized Work Principles around

it in three sections: To Get the Culture Right, To Get the People Right, and

To Build and Evolve Your Machine. Each chapter within these sections

begins with a higher-level principle. Reading these will give you a good

sense of the main concepts in each chapter.

Under these higher-level principles there are a number of supporting

principles built around the many different types of decisions that need to be

made. These principles are meant for reference. Though you might want to

skim through them, I recommend using them as one would use an

encyclopedia or search engine to answer a specific question. For example, if

you have to fire (or transfer) someone, you should use the Table of Principles

and go to the section of principles about that. To make this easier, at

Bridgewater we created a tool called the “Coach” that allows people to type

in their particular issue and find the appropriate principles to help them with

it.

I will soon be making that available to the public, along with many of the

other management tools you’ll read about in the final section of the book.

My main objective is not to sell you on these principles but to share the

most valuable lessons I’ve learned over my more than forty-year journey. My

goal is to get you to think hard about the tough tradeoffs that you will face in

many types of situations. By thinking about the tradeoffs behind the

principles, you will be able to decide for yourself which principles are best

for you.

This brings me to my most fundamental work principle:

• Make your passion and your work one and the

same and do it with people you want to be with.

Work is either 1) a job you do to earn the money to pay for the life you want

to have or 2) what you do to achieve your mission, or some mix of the two. I

urge you to make it as much 2) as possible, recognizing the value of 1). If

you do that, most everything will go better than if you don’t.

Work Principles is written for those for whom work is primarily the game

that you play to follow your passion and achieve your mission.

36 We applied these ways of operating to the businesses of investing and managing. In the

process of investing I developed a practical understanding of what makes businesses and

economies succeed, and in the process of managing my company I had to develop a

practical understanding of how to manage businesses well. And I liked that my

understanding of these subjects could be objectively measured via our investment

performance as well as our business performance.

37 Because Principles is an evolving document, with new principles being added and old

ones getting refined all the time, they will be changed. You will be able to find them in my

forthcoming Principles app, which you can learn about at www.principles.com.

TO GET THE CULTURE RIGHT . . .

You have to work in a culture that suits you. That’s fundamental to your

happiness and your effectiveness. You also must work in a culture that is

effective in producing great outcomes, because if you don’t, you won’t get

the psychic and material rewards that keep you motivated. In this section on

culture I will share my thoughts on how to match your culture to your needs,

and I will explain the type of culture that I wanted and that has worked so

well for me: an idea meritocracy.

In Chapter One, I explain what an idea meritocracy looks like, and explore

why radical truth and radical transparency are essential for it to work well.

Being radically truthful and radically transparent are probably the most

difficult principles to internalize, because they are so different from what

most people are used to. Because this way of being is frequently

misunderstood, I tried especially hard to be crystal clear in conveying why

we operate this way and how it works in practice.

In Chapter Two, we will turn our attention to why and how to build a

culture that fosters meaningful relationships. Besides being rewarding

themselves, meaningful relationships enable the radical truth and

transparency that allow us to hold each other accountable for producing

excellence.

I believe that great cultures, like great people, recognize that making

mistakes is part of the process of learning, and that continuous learning is

what allows an organization to evolve successfully over time. In Chapter

Three, we will explore the principles for doing that well.

Of course, an idea meritocracy is based on the belief that pulling people’s

thinking together and stress-testing it produces better outcomes than when

people keep their disparate thoughts in their own heads. Chapter Four

contains principles for “getting in sync” well. Knowing how to have

thoughtful disagreements is key.

Idea meritocracies carefully weigh the merits of its members’ opinions.

Since many opinions are bad and virtually everyone is confident that theirs

are good, the process of being able to sort through them well is important to

understand. Chapter Five explains our system for believability-weighted

decision making.

Since disagreements sometimes remain even after decisions are made, one

also needs principles for resolving them that are clearly communicated,

consistently adhered to, and universally recognized as fair. I go over these in

Chapter Six.

MAKE YOUR IDEA MERITOCRACY WORK IN A

WAY THAT SUITS YOU

While all of what you read here may seem challenging and complicated in

practice, if you believe as I do that there is no better way to make decisions

than to have believable people open-mindedly and assertively surface,

explore, and resolve their differences, then you will figure out what it takes to

operate that way. If an idea meritocracy doesn’t work well, the fault doesn’t

lie in the concept; it lies in people not valuing it enough to make sure that it

works.

If you take nothing else away from this book, you owe it to yourself to see

what it’s like to experience an idea meritocracy. If it makes sense to you, I

hope you will take the plunge. It won’t take long for you to understand what

a radical difference it will make to your work and your relationships.

To have an Idea

Meritocracy:

1) Put your honest

thoughts on the

table

2) Have

thoughtful

disagreement

3) Abide by

agreed-upon ways

of getting past

disagreement

1 Trust in Radical Truth and

Radical Transparency

Understanding what is true is essential for success, and being radically

transparent about everything, including mistakes and weaknesses, helps

create the understanding that leads to improvements. That’s not just a theory;

we have put this into practice at Bridgewater for over forty years, so we know

how it works. But like most things in life, being radically truthful and

transparent has cons as well as pros, which I will describe as accurately as

possible in this chapter.

Being radically truthful and transparent with your colleagues and

expecting your colleagues to be the same with you ensures that important

issues are apparent instead of hidden. It also enforces good behavior and

good thinking, because when you have to explain yourself, everyone can

openly assess the merits of your logic. If you are handling things well, radical

transparency will make that clear, and if you are handling things badly,

radical transparency will make that clear as well, so it helps to maintain high

standards.

Radical truth and radical transparency are fundamental to having a real

idea meritocracy. The more people can see what is happening—the good, the

bad, and the ugly—the more effective they are at deciding the appropriate

ways of handling things. This approach is also invaluable for training:

Learning is compounded and accelerated when everyone has the opportunity

to hear what everyone else is thinking. As a leader, you will get the feedback

essential for your learning and for the continual improvement of the

organization’s decision-making rules. And seeing firsthand what’s happening

and why builds trust and allows people to make the independent assessments

of the evidence that a functioning idea meritocracy requires.

ADAPTING TO RADICAL TRUTH AND RADICAL

TRANSPARENCY

It takes getting used to. Virtually everyone who joins Bridgewater believes

intellectually that radical truth and radical transparency are what they want,

because, after careful thought, that’s what they signed up for. Yet most find it

difficult to adjust to it because they struggle with the “two yous” as explained

in Understand That People Are Wired Very Differently. While their “upper-

level yous” understand the benefits of it, their “lower-level yous” tend to

react with a flight-or-fight response. Adapting typically takes about eighteen

months, though it varies from individual to individual, and there are those

who never successfully adapt to it.

Some people tell me it’s inconsistent with human nature to operate this

way—that people need to be protected from harsh truths and that such a

system could never work in practice. Our experience—and our success—

have proven that wrong. While it’s true that our way of being is not what

most people are used to, that doesn’t make it unnatural, any more than the

hard physical exercise athletes and soldiers do is unnatural. It is a

fundamental law of nature that you get stronger only by doing difficult

things. While our idea meritocracy is not for everyone, for those who do

adapt to it—which is about two-thirds of those who try it—it is so liberating

and effective that it’s hard for them to imagine any other way to be. What

most people like best is knowing there is no spin.

RADICAL TRUTH AND TRANSPARENCY IN

PRACTICE

To give you an idea of what radical truth and transparency look like, I’ll

share a difficult situation we faced a few years ago when our Management

Committee began thinking about reorganizing our back office. Our back

office provides the services we need to support our trading in the markets,

including trade confirmations, settlements, record maintenance, and

accounting. We had built this team up over many years and it was full of

hardworking, close-knit employees who were part of our extended family.

But at the time we were seeing a need for new capacities that would stretch

us beyond what we could do in-house. This led our COO, Eileen Murray, to

devise an innovative strategy for spinning off this team and having them

incorporated into a tailor-made group within the Bank of New York/Mellon.

It was just an exploratory conversation at first; we had no idea whether we

would pursue it, how we would pursue it, or what that would ultimately mean

for the members of our back office team.

Put yourself in the shoes of the Management Committee. When would you

tell the back office team that you were thinking of spinning off their group

into another company? Would you wait until the picture was clear? In most

organizations this kind of strategic decision would typically be kept under

wraps until it was a done deal, because bosses generally think it’s bad to

create uncertainty among employees. We believe the opposite: that the only

responsible way to operate is truthfully and transparently, so that people

know what’s really going on and can help us sort through any issues that

arise. In this case, Eileen led a town-hall meeting with the back office team

right away. In the way typical of leaders at Bridgewater, she explained that

there was a lot she didn’t know and there were a lot of questions that she

wouldn’t be able to answer. This was the harsh reality at that moment, and

while it did create uncertainty, had she followed the more traditional

approach of being less open, the inevitable rumors and speculation would’ve

made things much worse.

Though the group ultimately did get spun off, we continue to have

wonderful relationships with the people in it. Not only did they cooperate

fully throughout the transition, they still come to our Christmas and Fourth of

July parties and remain a part of our extended family. Today, we have an

award-winning back office because of the innovative things this change

allowed us to do. Most importantly, since we were operating openly even

while we hadn’t figured things out, the back office team had their confidence

in our truthfulness and consideration for them reinforced, and they returned it

in kind.

For me, not telling people what’s really going on so as to protect them

from the worries of life is like letting your kids grow into adulthood believing

in the Tooth Fairy or Santa Claus. While concealing the truth might make

people happier in the short run, it won’t make them smarter or more trusting

in the long run. It’s a real asset that people know they can trust what we say.

For that reason I believe that it’s almost always better to shoot straight, even

when you don’t have all the answers or when there’s bad news to convey. As

Winston Churchill said, “There is no worse course in leadership than to hold

out false hopes soon to be swept away.” People need to face harsh and

uncertain realities if they are going to learn how to deal with them—and

you’ll learn a lot about the people around you by seeing how well they do.

1.1 Realize that you have nothing to fear from

knowing the truth.

If you’re like most people, the idea of facing the unvarnished truth makes you

anxious. To get over that, you need to understand intellectually why untruths

are scarier than truths and then, through practice, get accustomed to living

with them.

If you’re sick, it’s natural to fear your doctor’s diagnosis—what if it’s

cancer or some other deadly disease? As scary as the truth may turn out to be,

you will be better off knowing it in the long run because it will allow you to

seek the most appropriate treatment. The same holds for learning painful

truths about your own strengths and weaknesses. Knowing and acting on the

truth is what we call the “big deal” at Bridgewater. It’s important not to get

hung up on all those emotion- and ego-laden “little deals” that can distract

you from the overall mission.

1.2 Have integrity and demand it from others.

Integrity comes from the Latin word integritas, meaning “one” or “whole.”

People who are one way on the inside and another way on the outside—i.e.,

not “whole”—lack integrity; they have “duality” instead. While presenting

your view as something other than it is can sometimes be easier in the

moment (because you can avoid conflict, or embarrassment, or achieve some

other short-term goal), the second- and third-order effects of having integrity

and avoiding duality are immense. People who are one way on the inside and

another on the outside become conflicted and often lose touch with their own

values. It’s difficult for them to be happy and almost impossible for them to

be their best.

Aligning what you say with what you think and what you think with what

you feel will make you much happier and much more successful. Thinking

solely about what’s accurate instead of how it is perceived pushes you to

focus on the most important things. It helps you sort through people and

places because you’ll be drawn to people and places that are open and honest.

It’s also fairer to those around you: Making judgments about people so that

they are tried and sentenced in your head, without asking for their

perspective, is both unethical and unproductive. Having nothing to hide

relieves stress and builds trust.

a. Never say anything about someone that you wouldn’t say to them directly and

don’t try people without accusing them to their faces. Criticism is welcomed and

encouraged at Bridgewater, but there is never a good reason to bad-mouth

people behind their backs. It is counterproductive and shows a serious lack of

integrity, it doesn’t yield any beneficial change, and it subverts both the

person being badmouthed and the environment as a whole. Next to being

dishonest, it is the worst thing you can do in our community.

Managers should not talk about people who work for them if they are not

in the room. If someone is not present at a meeting where something relevant

to them is discussed, we always make sure to send them a recording of the

meeting and other relevant information.

b. Don’t let loyalty to people stand in the way of truth and the well-being of the

organization. In some companies, employees hide their employer’s mistakes,

and employers do the same in return. This is unhealthy and stands in the way

of improvement because it prevents people from bringing their mistakes and

weaknesses to the surface, encourages deception, and eliminates

subordinates’ right of appeal.

The same thing applies to the idea of personal loyalty. I have regularly

seen people kept in jobs that they don’t deserve because of their personal

relationship to the boss, and this leads to unscrupulous managers trading on

personal loyalties to build fiefdoms for themselves. Judging one person by a

different set of rules than another is an insidious form of corruption that

undermines the meritocracy.

I believe in a healthier form of loyalty founded on openly exploring what

is true. Explicit, principled thinking and radical transparency are the best

antidotes for self-dealing. When everyone is held to the same principles and

decision making is done publicly, it is difficult for people to pursue their own

interests at the expense of the organization’s. In such an environment, those

who face their challenges have the most admirable character; when mistakes

and weaknesses are hidden, unhealthy character is rewarded instead.

1.3 Create an environment in which everyone has the

right to understand what makes sense and no

one has the right to hold a critical opinion

without speaking up.

Whether people have the independence and character to fight for the best

answers will depend upon their nature, but you can encourage them by

creating an atmosphere in which everyone’s first thought is to ask: “Is it

true?”

a. Speak up, own it, or get out. In an idea meritocracy, openness is a

responsibility; you not only have the privilege to speak up and “fight for

right” but are obliged to do so. This extends especially to principles. Just like

everything else, principles need to be questioned and debated. What you’re

not allowed to do is complain and criticize privately—either to others or in

your own head. If you can’t fulfill this obligation, then you must go.

Of course open-mindedly exploring what’s true with others is not the same

thing as stubbornly insisting that only you are right, even after the decision-

making machine has settled an issue and moved on. There will inevitably be

cases where you must abide by some policy or decision that you disagree

with.

b. Be extremely open. Discuss your issues until you are in sync with each other

or until you understand each other’s positions and can determine what should

be done. As someone I worked with once explained, “It’s simple—just don’t

filter.”

c. Don’t be naive about dishonesty. People lie more than most people imagine. I

learned that by being in the position of being responsible for everyone in the

company. While we have an exceptionally ethical group of people, in all

organizations there are dishonest people who have to be dealt with in

practical ways. For example, don’t believe most people who are caught being

dishonest when they say that they’ve seen the light and will never do it again

because chances are they will. Dishonest people are dangerous, so keeping

them around isn’t smart.

At the same time, let’s be practical. If I tried to limit my relationships to

people who never lied, I’d have nobody to work with. While I have extremely

high standards when it comes to integrity, I don’t view it in a black-white,

one-strike-and-you’re-out way. I look at the severity, the circumstances, and

the patterns to try to understand whether I am dealing with a person who is a

habitual liar and will lie to me again, or with a person who is fundamentally

honest yet imperfect. I consider the significance of the dishonesty itself (Was

the person stealing a piece of cake or were they committing a felony?) as well

as the nature of our existing relationship (Is it my spouse telling the lie, a

casual acquaintance, or an employee?). Treating such cases differently is

appropriate because a basic law of justice is that the punishment should fit the

crime.

1.4 Be radically transparent.

If you agree that a real idea meritocracy is an extremely powerful thing, it

should not be a great leap for you to see that giving people the right to see

things for themselves is better than forcing them to rely on information

processed for them by others. Radical transparency forces issues to the

surface—most importantly (and most uncomfortably) the problems that

people are dealing with and how they’re dealing with them—and it allows the

organization to draw on the talents and insights of all its members to solve

them. Eventually, for people who get used to it, living in a culture of radical

transparency is more comfortable than living in the fog of not knowing

what’s going on and not knowing what people really think. And it is

incredibly effective. But, to be clear, like most great things it also has

drawbacks. Its biggest drawback is that it is initially very difficult for most

people to deal with uncomfortable realities. If unmanaged, it can lead to

people getting involved with more things than they should, and can lead

people who aren’t able to weigh all the information to draw the wrong

conclusions.

For example, bringing all an organization’s problems to the surface and

regarding every one of them as intolerable may lead some people to wrongly

conclude that their organization has more intolerable problems than another

organization that keeps its issues under wraps. Yet which organization is

more likely to achieve excellence? One that highlights its problems and

considers them intolerable or one that doesn’t?

Don’t get me wrong: Radical transparency isn’t the same as total

transparency. It just means much more transparency than is typical. We do

keep some things confidential, such as private health matters or deeply

personal problems, sensitive details about intellectual property or security

issues, the timing of a major trade, and at least for the short term, matters that

are likely to be distorted, sensationalized, and harmfully misunderstood if

leaked to the press. In the following principles, you will get a good

explanation of when and why we’ve found it helpful to be transparent and

when and why we’ve found it inappropriate.

Frankly, when I started off being so radically transparent, I had no idea

how it would go; I just knew that it was extremely important and that I had to

fight hard and find ways to make it happen. I pushed the limits and was

surprised by how well it worked. For example, when I started taping all our

meetings our lawyers told us we were crazy because we were creating

evidence that could be used against us in court or by regulators such as the

SEC. In response, I theorized that radical transparency would reduce the risk

of our doing anything wrong—and of not dealing appropriately with our

mistakes—and that the tapes would in fact protect us. If we were handling

things well, our transparency would make that clear (provided, of course, that

all parties are reasonable, which isn’t something you can always take for

granted), and if we were handling things badly, our transparency would

ensure that we would get what we deserve, which, in the long run, would be

good for us.

I didn’t know for sure at the time, but our experience has proven this

theory correct time and again. Bridgewater has had uncommonly few legal or

regulatory encounters, largely because of our radical transparency. That’s

because it’s tougher to do bad things and easier to find out what’s true and

resolve claims through radical transparency. Over the last several decades, we

have not had a single material legal or regulatory judgment against us.

Naturally, growing bigger and more successful attracts more media

attention, and reporters know that salacious and controversial stories draw

more eyeballs than balanced ones. Bridgewater is especially vulnerable to

this kind of reporting because, with our culture of bringing problems to the

surface and sharing them transparently within the company, we leave

ourselves open to leaks. Would it be better not to be transparent and so avoid

such problems?

I’ve learned that the people whose opinions matter most are those who

know us best—our clients and our employees—and that our radical

transparency serves us well with them. Not only has it led to our producing

better results, but it also builds trust with our employees and clients so that

mischaracterizations in the press roll off their backs. When we discuss such

situations with them, they say that for us to not operate transparently would

scare them much more.

Having this sort of understanding and support to do the right things has

been immeasurably valuable. But we wouldn’t have known about these great

payoffs if we hadn’t so steadfastly pushed the limits of this truth and

transparency.

a. Use transparency to help enforce justice. When everyone can follow the

discussion leading up to a decision—either in real time in person or via taped

records and email threads—justice is more likely to prevail. Everyone is held

accountable for their thinking and anyone can weigh in on who should do

what according to shared principles. Absent such a transparent process,

decisions would be settled behind closed doors by those who have the power

to do whatever they want. With transparency, everyone is held to the same

high standards.

b. Share the things that are hardest to share. While it might be tempting to limit

transparency to the things that can’t hurt you, it is especially important to

share the things that are most difficult to share, because if you don’t share

them you will lose the trust and partnership of the people you are not sharing

with. So, when faced with the decision to share the hardest things, the

question should not be whether to share but how. The following principles

will help you do this well.

c. Keep exceptions to radical transparency very rare. While I would like virtually

total transparency and wish that everyone would handle the information they

have access to responsibly to work out what’s true and what to do about it, I

realize that’s an ideal to be approached but never fully achieved. There are

exceptions to every rule, and in very rare cases, it is better not to be radically

transparent. In those unusual cases, you will need to figure out a way that

preserves the culture of radical transparency without exposing you and those

you care about to undue risks.

When weighing an exception, approach it as an expected value

calculation, taking into consideration the second- and third-order

consequences. Ask yourself whether the costs of making the case transparent

and managing the risks of that transparency outweigh the benefits. In the vast

majority of cases, they don’t. I’ve found that the most common reasons to

limit broad transparency are:

1. Where the information is of a private, personal, or confidential nature

and doesn’t meaningfully impact the community at large.

2. Where sharing and managing such information puts the long-term

interests of the Bridgewater community, its clients, and our ability to

uphold our principles at risk (for instance, our proprietary investment

logic or a legal dispute).

3. Where the value of sharing the information broadly with the community

is very low and the distraction it would cause would be significant

(compensation, for instance).

What I’m saying is that I believe one should push the limits of being

transparent while remaining prudent. Because we tape virtually everything—

including our mistakes and weaknesses—for everyone to see, we are a target-

rich environment for media that thrives on sensationalistic or critical gossip

and can find ways of having information leaked to them. In one case when

we faced the problem of having information leaked to the press that was

intentionally distorted and hurt our recruiting efforts, we were forced to

institute some controls on ultrasensitive information, so that only a significant

number of ultratrustworthy people received it in real time, and it was

distributed to others after a delay. The information was the sort that, in a

typical company, would be shared with just a handful but at Bridgewater was

shared with nearly a hundred trusted people. In other words, while our radical

transparency in that case wasn’t total, I pushed its limits in a practical way. It

served us well because the people who most needed the transparency got it

right away and most everyone understood that the commitment to being

transparent remained very much intact, even in challenging circumstances.

People know that my intent is to always push the limits of trying to be

transparent and that the only things that would prevent me from doing that

will be the interests of the company and that I will tell them if I can’t be

transparent and why. It is in our culture to be that way and that fosters trust,

even when the transparency is less than we would like it to be.

d. Make sure those who are given radical transparency recognize their responsibilities

to handle it well and to weigh things intelligently.

People cannot be given the privilege of receiving information and then use

the information to harm the company, so rules and procedures must be in

place to ensure that doesn’t happen. For example, we provide great

transparency inside Bridgewater on the condition that Bridgewater citizens do

not leak it outside; if they do, they will be dismissed for cause (for unethical

behavior). Additionally, the rules for how issues are explored and decisions

are made must be maintained, and because different people have different

perspectives, it’s important that the paths for resolving them are followed.

For example, some people are going to make big deals out of little deals,

come up with their own wrong theories, or have problems seeing how things

are evolving. Remind them of the risks that the company takes to give them

that transparency and their responsibilities to handle the information that they

get responsibly. I have found that people appreciating this transparency and

knowing that they will lose it if it is not handled well leads them to enforce

good behavior with each other.

e. Provide transparency to people who handle it well and either deny it to people who

don’t handle it well or remove those people from the organization. It is the right and

responsibility of management, and not the right of all employees, to

determine when exceptions to radical transparency should be made.

Management should restrict transparency sparingly and wisely because every

time they do, it undermines the idea meritocracy and people’s trust.

f. Don’t share sensitive information with the organization’s enemies.

Both inside and outside of any organization, there are some people who will

intentionally cause the organization harm. If these enemies are within your

organization, you need to call them out to resolve this conflict through the

organization’s system for achieving such resolutions, because working with

enemies within your “extended family” will undermine you and the “family.”

If the enemies are outside your organization and will use the information to

harm you, of course don’t share it.

1.5 Meaningful relationships and meaningful work

are mutually reinforcing, especially when

supported by radical truth and radical

transparency.

The most meaningful relationships are achieved when you and others can

speak openly to each other about everything that’s important, learn together,

and understand the need to hold each other accountable to be as excellent as

you can be. When you have such relationships with those you work with, you

pull each other through challenging times; at the same time, sharing

challenging work draws you closer and strengthens your relationships. This

self-reinforcing cycle creates the success that allows you to pursue more and

more ambitious goals.

2 Cultivate Meaningful Work

and Meaningful Relationships

Meaningful relationships are invaluable for building and sustaining a culture

of excellence, because they create the trust and support that people need to

push each other to do great things. If the overwhelming majority of people

care about having an excellent community, they will take care of it, which

will yield both better work and better relationships. Relationships have to be

genuine, not forced; at the same time, the culture of the community will have

a big influence on how people value relationships and how they behave with

each other. To me, a meaningful relationship is one in which people care

enough about each other to be there whenever someone needs support and

they enjoy each other’s company so much that they can have great times

together both inside and outside of work. I literally love many of the people I

work with, and I respect them deeply.

I have often been asked whether relationships at Bridgewater are more like

those of a family or those of a team, the implication being that in a family

there is unconditional love and a permanent relationship, while in a team the

attachment is only as strong as the person’s contribution. Before answering

this question, I want to emphasize that either is good by me, because both

families and teams provide meaningful relationships and that neither is

anything like a typical job at a typical company, where the relationships are

primarily utilitarian. But to answer the question directly, I wanted

Bridgewater to be like a family business in which family members have to

perform excellently or be cut. If I had a family business and a family member

wasn’t performing well, I would want to let them go because I believe that it

isn’t good for either the family member (because staying in a job they’re not

suited to stands in the way of their personal evolution) or the company

(because it holds back the whole community). That’s tough love.

To give you an idea of how Bridgewater’s culture developed and how it’s

different from what you’d find at most companies, I will tell you about how

we handled benefits in our early days. When the company was just me and a

small group of people, I didn’t provide employees with health insurance; I

assumed that they would buy it on their own. But I did want to help the

people I shared my life with during their times of need. If someone I worked

with got seriously sick and couldn’t afford proper care, what was I going to

do, stand by and not help them? Of course I’d help them financially, to

whatever extent I could. So when I did begin providing health insurance to

my employees, I felt that I was insuring myself against the money I knew I’d

give them if they were injured or fell ill as much as I was insuring them.

Because I wanted to make certain that they received the best care possible,

the policies I provided allowed them to go to any doctor they chose and

spend whatever amount was required. On the other hand, I didn’t protect

them against the little things. For example, I didn’t provide dental insurance

any more than I provided car insurance, because I felt that it was their own

responsibility to protect their teeth, just as it was their own responsibility to

take care of their car. If they needed dental insurance, they could pay for it

out of their own pocket. My main point is that I didn’t approach benefits in

the impersonal, transactional way most companies do, but more like

something I provided for my family. I was more than generous with some

things and expected people to take personal responsibility for others.

When I treated my employees like extended family, I found that they

typically behaved the same way with each other and our community as a

whole, which was much more special than having a strictly quid pro quo

relationship. I can’t tell you how many people would do anything in their

power to help our community/company and wouldn’t want to work anywhere

else. This is invaluable.

As Bridgewater grew, my ability to have quality personal contact with

everyone faded, but this wasn’t a problem because the broader community

embraced this way of being with each other. This didn’t just happen; we did a

lot to help it along. For example, we put into place a policy that we would

pay for half of practically any activities that people want to do together up to

a set cap (we now support more than a hundred clubs and athletic and

common-interest groups); we paid for food and drink for those who hosted

potluck dinners at their houses; and we bought a house that employees can

use for events and celebrations. We have Christmas, Halloween, Fourth of

July, and other parties that often include family members. Eventually, others

who valued this kind of relationship took responsibility for it and it spread to

become a cultural norm so that I could just sit back and watch beauty happen.

What about the person who doesn’t give a damn about all of this

meaningful relationship stuff, who just wants to go into work, do a good job,

and receive fair compensation? Is that okay? Sure it is, and it’s common for a

significant percentage of employees. Not everyone feels the same or is

expected to feel the same about the community. It’s totally okay to opt out.

We have all sorts of people and respect whatever they want to do on their

own time, as long as they abide by the law and are considerate. But these are

not the folks who will provide the community with the skeletal strength of

commitment that is essential for it to be extraordinary over very long periods

of time.

No matter how much one tries to create a culture of meaningful

relationships, the organization is bound to have some bad (intentionally

harmful) people in it. Being there isn’t good for them or the company so it’s

best to find out who they are and remove them. We have found that the

higher the percentage of people who really care about the organization, the

fewer the number of bad people there are, because the people who really care

protect the community against them. We have also found that our radical

transparency helps make it clearer which are which.

2.1 Be loyal to the common mission and not to

anyone who is not operating consistently with it.

Loyalty to specific people who are not in tight sync with the mission and how

to achieve it will create factionalism and undermine the well-being of the

community. It is often the case, and quite beautiful, that personal loyalties

exist. However, it is also often the case, and quite ugly, when personal

loyalties come into conflict with the organization’s interests.

2.2 Be crystal clear on what the deal is.

To have a good relationship, you must be clear with each other about what

the quid pro quo is—what is generous, what is fair, and what is just plain

taking advantage—and how you will be with each other.

One important thing that typically divides people is how they approach

their work. Are they working just for their paycheck or are they looking for

something more? Each of us has our own views about what is most

important. I’ve made a lot of money through my work, but I see my job as

much more than as a way to make money—it’s how I choose to live out my

values around excellence, meaningful work, and meaningful relationships. If

the people I worked with were primarily interested in making money, we

would have conflicts whenever we had to choose between upholding our

values and making an easy buck. Don’t get me wrong—of course I

understand that people don’t work for personal satisfaction alone, and that a

job must be economically viable. But we all have definite ideas about what

we value and what we want our relationships to be like, and employers and

employees have to be in sync on such things.

Naturally there will be disagreement and negotiation, but some things

cannot be compromised and you and your employees must know what those

things are. This is especially true if you’re seeking to create an environment

that has shared values, a deep commitment to the mission, and high standards

of behavior.

At Bridgewater, we expect people to behave in a manner that is consistent

with how people in high-quality, long-term relationships behave—that is,

with a high level of mutual consideration for each other’s interests and a clear

understanding of who is responsible for what. On the surface, that sounds

nice and straightforward, but what exactly does that mean? It is important to

be clear.

Take for example a case in which an employee’s family member is

diagnosed with a severe illness, or an employee dies tragically, leaving his or

her family in a precarious situation. These things happen far more often than

any of us would like them to, and there are of course customs and laws that

define the basic accommodations and benefits (such as personal vacation

days, short- and long-term disability insurance, and life insurance) that are

required. But how do you determine what kinds of assistance should be

provided beyond that? What are the principles for deciding how to handle

each specific situation fairly—which may not always mean doing the same

thing in every case?

None of this is easy, but the following principles provide some guidance.

a. Make sure people give more consideration to others than they demand for

themselves. This is a requirement.

Being considerate means allowing other people to mostly do what they

want, so long as it is consistent with our principles, policies, and the law. It

also means being willing to put others ahead of your own desires. If the

people on both sides of an argument approach their disagreements in this

way, we will have many fewer disputes about who is offending whom.

Still, judgments will have to be made and lines will have to be drawn and

set down in policies.

This is the overarching guideline: It is more inconsiderate to prevent

people from exercising their rights because you are offended by them than it

is for them to do whatever it is that offends you. That said, it is inconsiderate

not to weigh the impact of one’s actions on others, so we expect people to use

sensible judgment in not doing obviously offensive things. There are some

behaviors that are clearly offensive to many people, and it is appropriate to

specify and prohibit them in clear policies. The list of those specifics, and the

policies pertaining to them, arise from specific cases. Applying this principle

to them is done in much the same way that case law is created.

b. Make sure that people understand the difference between fairness and generosity.

Sometimes people mistake generosity for not being fair. For example, when

Bridgewater arranged for a bus to shuttle people who live in New York City

to our Connecticut office, one employee asked, “It seems it would be fair to

also compensate those of us who spend hundreds of dollars on gas each

month, particularly in light of the New York City bus.” This line of thinking

mistakes an act of generosity for some for an entitlement for everyone.

Fairness and generosity are different things. If you bought two birthday

gifts for two of your closest friends, and one cost more than the other, what

would you say if the friend who got the cheaper gift accused you of being

unfair? Probably something like, “I didn’t have to get you any gift, so stop

complaining.” At Bridgewater, we are generous with people (and I am

personally generous), but we feel no obligation to be measured and equal in

our generosity.

Generosity is good and entitlement is bad, and they can easily be

confused, so be crystal clear on which is which. Decisions should be based on

what you believe is warranted in a particular circumstance and what will be

most appreciated. If you want to have a community of people who have both

high-quality, long-term relationships and a high sense of personal

responsibility, you can’t allow a sense of entitlement to creep in.

c. Know where the line is and be on the far side of fair. The line is what’s fair,

appropriate, or required, as distinct from what’s generous, in light of the

defined quid pro quo relationship between parties. As mentioned earlier, you

should expect people to behave in a manner consistent with how people in

high-quality, long-term relationships behave—with a high level of mutual

consideration for each other’s interests and a clear understanding of who is

responsible for what. Each should operate on the far side of fair, by which I

mean giving more consideration to others than you demand for yourself. This

is different from how people in most commercial relationships generally

behave, as they tend to focus more on their own interests than on the interests

of others or of the community as a whole. If each party says “You deserve

more,” “No, you deserve more,” rather than “I deserve more,” you are more

likely to have generous, good relationships.

d. Pay for work. While it isn’t all about the quid pro quo between the company

and the employee, this balance must be economically viable for the

relationships to be sustainable. Set policies that clearly define this quid pro

quo, and be measured, but not excessively precise, when shifting it around.

While you should by and large stick to the arrangement, you should also

recognize that there are rare, special times when employees will need a bit of

extra time off and there are times that the company will require employees to

give it extra hours. The company should pay for above-normal work one way

or another, and employees should be docked for below-normal work. The

give-and-take should roughly equal out over time. Within reasonable

boundaries, nobody should worry about the exact ebbs and flows. But if the

needs of one side change on a sustained basis, the financial arrangement will

need to be readjusted to establish a new, appropriate relationship.

2.3 Recognize that the size of the organization can

pose a threat to meaningful relationships.

When there were just a few of us, we had meaningful relationships because

we knew and liked each other. When we grew to between fifty and a hundred

people, we had a community; when we grew beyond that, the sense of

community began to slip because we didn’t all know each other in the same

way. That’s when I realized that having groups (departments) of around a

hundred (give or take about fifty) that are bound collectively by our common

mission was the best way to scale the meaningful relationship. While bigger

companies tend to be more impersonal, that is just another challenge that has

to be figured out.

2.4 Remember that most people will pretend to

operate in your interest while operating in their

own.

For example, most people will operate in a way that maximizes the amount of

money they will get and that minimizes the amount of work they have to do

to get it.

To see this, just leave someone unsupervised and allow them to bill you

for what they have done. Be especially wary of this conflict of interest when

people are advising you on matters that will affect how much money they

earn—such as the lawyer who spends a lot of billable hours giving you

advice, or the salesperson who advises you on what to purchase while

receiving a commission on the amount that you spend. You can’t imagine

how many people I meet who are eager to “help” me.

Don’t be naive. Strive for the highest possible percentage of your

population having meaningful work and meaningful relationships while

recognizing that there will always be some percentage of the population who

won’t care for the community and/or will do it harm.

2.5 Treasure honorable people who are capable and

will treat you well even when you’re not looking.

They are rare. Such relationships take time to build and can only be built if

you treat such people well.

3 Create a Culture in Which It

Is Okay to Make Mistakes

and Unacceptable Not to

Learn from Them

Everyone makes mistakes. The main difference is that successful people

learn from them and unsuccessful people don’t. By creating an environment

in which it is okay to safely make mistakes so that people can learn from

them, you’ll see rapid progress and fewer significant mistakes. This is

especially true in organizations where creativity and independent thinking are

important, as success will inevitably require the acceptance of failure as a

part of the process. As Thomas Edison once said, “I have not failed. I’ve just

found ten thousand ways that do not work.”

Mistakes will cause you pain, but you shouldn’t try to shield yourself or

others from it. Pain is a message that something is wrong and it’s an effective

teacher that one shouldn’t do that wrong thing again. To deal with your own

and others’ weaknesses well you must acknowledge them frankly and openly

and work to find ways of preventing them from hurting you in the future. It’s

at this point that many people say, “No thanks, this isn’t for me—I’d rather

not have to deal with these things.” But this is against your and your

organization’s best interests—and will keep you from achieving your goals. It

seems to me that if you look back on yourself a year ago and aren’t shocked

by how stupid you were, you haven’t learned much. Still, few people go out

of their way to embrace their mistakes. It doesn’t have to be that way.

Remember back in Life Principles, when I told the story about the time

that Ross, then our head of trading, forgot to put in a trade for a client? The

money just sat there in cash and by the time the mistake was discovered it

had cost the client (actually Bridgewater, because we had to make good on it)

a lot of money. It was terrible and I could easily have fired Ross to make the

point that nothing less than perfection will be accepted. But that would have

been counterproductive. I would have lost a good man and it would have only

encouraged other employees to hide their mistakes, creating a culture that

would not only be dishonest but crippled in its ability to learn and grow. If

Ross hadn’t experienced that pain, he and Bridgewater would have been the

worse for it.

The point I made by not firing Ross was much more powerful than firing

him would have been—I was demonstrating to him and others that it was

okay to make mistakes and unacceptable not to learn from them. After the

dust settled, Ross and I worked together to build an error log (we now call it

the Issue Log), in which traders recorded all their mistakes and bad outcomes

so we could track them and address them systematically. It has become one

of the most powerful tools we have at Bridgewater. Our environment is one

in which people understand that remarks such as “You handled that badly”

are meant to be helpful rather than punitive.

Of course, in managing others who make mistakes, it is important to know

the difference between 1) capable people who made mistakes and are self-

reflective and open to learning from them, and 2) incapable people, or

capable people who aren’t able to embrace their mistakes and learn from

them. Over time I’ve found that hiring self-reflective people like Ross is one

of the most important things I can do.

Finding this kind of person isn’t easy. I’ve often thought that parents and

schools overemphasize the value of having the right answers all the time. It

seems to me that the best students in school tend to be the worst at learning

from their mistakes, because they have been conditioned to associate

mistakes with failure instead of opportunity. This is a major impediment to

their progress. Intelligent people who embrace their mistakes and weaknesses

substantially outperform their peers who have the same abilities but bigger

ego barriers.

3.1 Recognize that mistakes are a natural part of the

evolutionary process.

If you don’t mind being wrong on the way to being right you’ll learn a lot—

and increase your effectiveness. But if you can’t tolerate being wrong, you

won’t grow, you’ll make yourself and everyone around you miserable, and

your work environment will be marked by petty backbiting and malevolent

barbs rather than by a healthy, honest search for truth.

You must not let your need to be right be more important than your need

to find out what’s true. Jeff Bezos described it well when he said, “You have

to have a willingness to repeatedly fail. If you don’t have a willingness to

fail, you’re going to have to be very careful not to invent.”

a. Fail well. Everyone fails. Anyone you see succeeding is only succeeding at

the things you’re paying attention to—I guarantee they are also failing at lots

of other things. The people I respect most are those who fail well. I respect

them even more than those who succeed. That is because failing is a painful

experience while succeeding is a joyous one, so it requires much more

character to fail, change, and then succeed than to just succeed. People who

are just succeeding must not be pushing their limits. Of course the worst are

those who fail and don’t recognize it and don’t change.

b. Don’t feel bad about your mistakes or those of others. Love them! People

typically feel bad about their mistakes because they think in a shortsighted

way about the bad outcome and not about the evolutionary process of which

mistakes are an integral part. I once had a ski instructor who had also given

lessons to Michael Jordan, the greatest basketball player of all time. Jordan,

he told me, reveled in his mistakes, seeing each of them as an opportunity to

improve. He understood that mistakes are like those little puzzles that, when

you solve them, give you a gem. Every mistake that you make and learn from

will save you from thousands of similar mistakes in the future.

3.2 Don’t worry about looking good—worry about

achieving your goals.

Put your insecurities away and get on with achieving your goals. Reflect and

remind yourself that an accurate criticism is the most valuable feedback you

can receive. Imagine how silly and unproductive it would be to respond to

your ski instructor as if he were blaming you when he told you that you fell

because you didn’t shift your weight properly. It’s no different if a supervisor

points out a flaw in your work process. Fix it and move on.

a. Get over “blame” and “credit” and get on with “accurate” and “inaccurate.”

Worrying about “blame” and “credit” or “positive” and “negative” feedback

impedes the iterative process that is essential to learning. Remember that

what has already happened lies in the past and no longer matters except as a

lesson for the future. The need for phony praise needs to be unlearned.

3.3 Observe the patterns of mistakes to see if they are

products of weaknesses.

Everyone has weaknesses and they are generally revealed in the patterns of

mistakes they make. The fastest path to success starts with knowing what

your weaknesses are and staring hard at them. Start by writing down your

mistakes and connecting the dots between them. Then write down your “one

big challenge,” the weakness that stands the most in the way of your getting

what you want. Everyone has at least one big challenge. You may in fact

have several, but don’t go beyond your “big three.” The first step to tackling

these impediments is getting them out into the open.

3.4 Remember to reflect when you experience pain.

Remember this: The pain is all in your head. If you want to evolve, you need

to go where the problems and the pain are. By confronting the pain, you will

see more clearly the paradoxes and problems you face. Reflecting on them

and resolving them will give you wisdom. The harder the pain and the

challenge, the better.

Because these moments of pain are so important, you shouldn’t rush

through them. Stay in them and explore them so you can build a foundation

for improvement. Embracing your failures—and confronting the pain they

cause you and others—is the first step toward genuine improvement; it is

why confession precedes forgiveness in many societies. Psychologists call

this “hitting bottom.” If you keep doing this you will convert the pain of

facing your mistakes and weaknesses into pleasure and “get to the other side”

as I explained in Embrace Reality and Deal with It.

a. Be self-reflective and make sure your people are self-reflective. When there is

pain, the animal instinct is flight-or-fight. Calm yourself down and reflect

instead. The pain you are feeling is due to things being in conflict—maybe

you’ve come up against a terrible reality, such as the death of a friend, and

are unable to accept it; maybe you’ve been forced to acknowledge a

weakness that challenges the idea you’d had of yourself. If you can think

clearly about what’s behind it, you will learn more about what reality is like

and how to better deal with it. Self-reflectiveness is the quality that most

differentiates those who evolve quickly from those who don’t. Remember:

Pain + Reflection = Progress.

b. Know that nobody can see themselves objectively. While we should all strive to

see ourselves objectively, we shouldn’t expect everyone to be able to do that

well. We all have blind spots; people are by definition subjective. For this

reason, it is everyone’s responsibility to help others learn what is true about

themselves by giving them honest feedback, holding them accountable, and

working through disagreements in an open-minded way.

c. Teach and reinforce the merits of mistake-based learning. To encourage people

to bring their mistakes into the open and analyze them objectively, managers

need to foster a culture that makes this normal and that penalizes suppressing

or covering up mistakes. We do this by making it clear that one of the worst

mistakes anyone can make is not facing up to their mistakes. This is why the

use of the Issue Log is mandatory at Bridgewater.

3.5 Know what types of mistakes are acceptable and

what types are unacceptable, and don’t allow

the people who work for you to make the

unacceptable ones.

When considering the kinds of mistakes you are willing to allow in order to

promote learning through trial and error, weigh the potential damage of a

mistake against the benefit of incremental learning. In defining what latitude

I’m willing to give people, I say, “I’m willing to let you scratch or dent the

car, but I won’t put you in a position where there’s a significant risk of your

totaling it.”

PAIN

REFLECTION

PROGRESS

4 Get and Stay in Sync

Remember that for an organization to be effective, the people who make it

up must be aligned on many levels—from what their shared mission is, to

how they will treat each other, to a more practical picture of who will do what

when to achieve their goals. Yet alignment can never be taken for granted

because people are wired so differently. We all see ourselves and the world in

our own unique ways, so deciding what’s true and what to do about it takes

constant work.

Alignment is especially important in an idea meritocracy, so at

Bridgewater we try to attain alignment consciously, continually, and

systematically. We call this process of finding alignment “getting in sync,”

and there are two primary ways it can go wrong: cases resulting from simple

misunderstandings and those stemming from fundamental disagreements.

Getting in sync is the process of open-mindedly and assertively rectifying

both types.

Many people mistakenly believe that papering over differences is the

easiest way to keep the peace. They couldn’t be more wrong. By avoiding

conflicts one avoids resolving differences. People who suppress minor

conflicts tend to have much bigger conflicts later on, which can lead to

separation, while people who address their mini-conflicts head on tend to

have the best and the longest-lasting relationships. Thoughtful disagreement

—the process of having a quality back-and-forth in an open-minded and

assertive way so as to see things through each other’s eyes—is powerful,

because it helps both parties see things they’ve been blind to. But it’s not

easy. While it is straightforward to have a meritocracy in activities in which

there is clarity of relative abilities (because the results speak for themselves

such as in sports, where the fastest runner wins the race), it is much harder in

a creative environment (where different points of view about what’s best

have to be resolved). If they’re not, the process of sorting through

disagreements and knowing who has the authority to decide quickly becomes

chaotic. Sometimes people get angry or stuck; a conversation can easily wind

up with two or more people spinning unproductively and unable to reach

agreement on what to do.

For these reasons, specific processes and procedures must be followed.

Every party to the discussion must understand who has what rights and which

procedures should be followed to move toward resolution. (We’ve also

developed tools for helping do this, which you can review at the end of this

book.) And everyone must understand the most fundamental principle for

getting in sync, which is that people must be open-minded and assertive at

the same time. Thoughtful disagreement is not a battle; its goal is not to

convince the other party that he or she is wrong and you are right, but to find

out what is true and what to do about it. It must also be nonhierarchical,

because in an idea meritocracy communication doesn’t just flow

unquestioned from the top down. Criticisms must also come from the bottom

up.

For example, this email was sent to me by someone who worked for me

after a meeting with clients. All the senior people at Bridgewater, including

me, are routinely criticized and judged by our subordinates.

From: Jim H

To: Ray; Lionel K; Greg J; Randal S; David A

Subject: Feedback on ABC Meeting . . .

Ray- you deserve a “D-” for your performance today in the ABC meeting

and everyone that was in the room that saw you agrees on that harsh

assessment (give or take half a grade). This was especially disappointing

for two reasons: 1) You have been great in previous meetings where the

subject matter to be covered was the same, and 2) We held a specific

planning meeting yesterday to ask you to focus tightly on culture and

portfolio structuring because we had only 2 hours to have you cover

those two topics, me cover the investment process, have Greg do the

observatory and have Randal do implementation. Instead, you took a

total of 62 minutes (I measured) but worse, you rambled for 50 minutes

on what I think was portfolio structuring topics and only then got to

culture and you talked about that for 12 minutes. It was obvious to all of

us that you did not prepare at all because there is no way you could have

been that disorganized at the outset if you had prepared.

Similarly I’d like to share another case in which one of our senior

managers observed a conversation between Greg Jensen, who was then CEO,

and a junior employee, and felt that Greg was speaking to that employee in a

way that discouraged dissent and independent thinking. She raised this in

feedback she gave Greg. Greg disagreed, asserting that he was simply

reminding the employee of relevant principles and her responsibilities to

either adhere to them or openly question them. The two sought to get in sync

through a series of emails, and when that didn’t work, they raised their

disagreement to the Management Committee. A case based on the meeting in

question was sent to the entire company so everyone could judge for

themselves who was right and who was wrong. It was a good learning

exercise that Greg and the senior manager appreciated. We used it to reflect

on our written principles for handling situations like this and they both got a

lot of useful feedback. If we hadn’t laid out our principles and used them to

judge cases like this, we would have people with power making decisions

however they wanted instead of in mutually agreed-upon ways.

The principles that follow flesh out how we do this. If they are adhered to,

you will be well aligned with others and your idea meritocracy will hum with

productivity. If they are not, it will grind to a halt.

4.1 Recognize that conflicts are essential for great

relationships . . .

. . . because they are how people determine whether their principles are aligned and

resolve their differences. Everyone has his or her own principles and values, so

all relationships entail a certain amount of negotiation or debate over how

people should be with each other. What you learn about each other will either

draw you together or drive you apart. If your principles are aligned and you

can work out your differences via a process of give-and-take, you will draw

closer together. If not, you will move apart. Open discussion of differences

ensures that there are no misunderstandings. If that doesn’t happen on an

ongoing basis, gaps in perspective will widen until inevitably there is a major

clash.

a. Spend lavishly on the time and energy you devote to getting in sync, because it’s the

best investment you can make. In the long run, it saves time by increasing

efficiency, but it’s important that you do it well. You will need to prioritize

what you are going to get in sync about and who you are going to get in sync

with because of time constraints. Your highest priority should be the most

important issues with the most believable and most relevant parties.

4.2 Know how to get in sync and disagree well.

It is harder to run an idea meritocracy in which disagreements are encouraged

than a top-down autocracy in which they are suppressed. But when believable

parties to disagreements are willing to learn from each other, their evolution

is faster and their decision making is far better.

The key is in knowing how to move from disagreement to decision

making. It is important that the paths for doing this are clear so that who is

responsible for doing what is known. (This is the reason I created a tool

called the Dispute Resolver, which lays out the paths and makes clear to

everyone if they are holding on to a different point of view rather than

moving it along to resolution. You can read about it in the tools appendix.)

It is essential to know where the ultimate decision-making authority lies—

i.e., how far the power of the argument will carry relative to the power of the

assigned authority. While arguing and especially after a decision is rendered,

everyone in the idea meritocracy must remain calm and respectful of the

process. It is never acceptable to get upset if the idea meritocracy doesn’t

produce the decision that you personally wanted.

a. Surface areas of possible out-of-syncness. If you and others don’t raise your

perspectives, there’s no way you will resolve your disputes. You can surface

the areas of disagreement informally or put them on a list to go over. I

personally like to do both, though I encourage people to list their

disagreements in order of priority so I/we can more easily direct them to the

right party at the right time.

The nubbiest questions (the ones that there is the greatest disagreement

about) are the most important ones to thrash out, as they often concern

differences in people’s values or their approaches to important decisions. It’s

especially important to bring these issues to the surface and examine their

premises thoroughly and unemotionally. If you don’t, they will fester and

cause rot.

b. Distinguish between idle complaints and complaints meant to lead to improvement.

Many complaints either fail to take into account the full picture or reflect a

closed-minded point of view. They are what I call “chirping,” and are

generally best ignored. But constructive complaints may lead to important

discoveries.

c. Remember that every story has another side. Wisdom is the ability to see both

sides and weigh them appropriately.

4.3 Be open-minded and assertive at the same time.

Being effective at thoughtful disagreement requires one to be open-minded

(seeing things through the other’s eyes) and assertive (communicating clearly

how things look through your eyes) and to flexibly process this information

to create learning and adaptation.

I have found that most people have problems being assertive and open-

minded at the same time. Typically they are more inclined to be assertive

than open-minded (because it’s easier to convey how they see things than to

understand how others do, and also because people tend to have ego

attachments to being right) though some people are too willing to accept

others’ views at the expense of their own. It’s important to remind people that

they have to do both—and to remember that decision making is a two-step

process in which one has to take in information as well as decide. It also

helps to remind people that those who change their minds are the biggest

winners because they learned something, whereas those who stubbornly

refuse to see the truth are losers. With practice, training, and constant

reinforcement, anyone can get good at this.

a. Distinguish open-minded people from closed-minded people. Open-minded

people seek to learn by asking questions; they realize how little they know in

relation to what there is to know and recognize that they might be wrong;

they are thrilled to be around people who know more than they do because it

represents an opportunity to learn something. Closed-minded people always

tell you what they know, even if they know hardly anything. They are

typically uncomfortable being around those who know a lot more than they

do.

b. Don’t have anything to do with closed-minded people. Being open-minded is

much more important than being bright or smart. No matter how much they

know, closed-minded people will waste your time. If you must deal with

them, recognize that there can be no helping them until they open their

minds.

c. Watch out for people who think it’s embarrassing not to know. They’re likely to

be more concerned with appearances than actually achieving the goal; this

can lead to ruin over time.

d. Make sure that those in charge are open-minded about the questions and comments

of others. The person responsible for a decision must be able to explain the

thinking behind it openly and transparently so that everyone can understand

and assess it. In the event of disagreement, an appeal should be made to

either the decision maker’s boss or an agreed-upon, knowledgeable group of

others, generally people more knowledgeable than and senior to the decision

maker.

e. Recognize that getting in sync is a two-way responsibility. In any conversation,

there is a responsibility to express and a responsibility to listen.

Misinterpretations and misunderstandings are always going to happen. Often,

difficulty in communication is due to people having different ways of

thinking (e.g., left-brained thinkers talking to right-brained thinkers). The

parties involved should always consider the possibility that one or both of

them misunderstood and do a back-and-forth so that they can get in sync.

Very simple tricks—like repeating what you’re hearing someone say to make

sure you’re actually getting it—can be invaluable. Start by assuming you’re

either not communicating or listening well instead of blaming the other party.

Learn from your miscommunications so they don’t happen again.

f. Worry more about substance than style. This is not to say that some styles

aren’t more effective than others with different people and in different

circumstances, but I often hear people complaining about the style or tone of

a criticism in order to deflect from its substance. If you think someone’s style

is an issue, box it as a separate issue to get in sync on.

g. Be reasonable and expect others to be reasonable. You have a responsibility to

be reasonable and considerate when you are advocating for your point of

view and should never let your “lower-level you” gain control, even if the

other person loses his or her temper. Their bad behavior doesn’t justify yours.

If either party to a disagreement is too emotional to be logical, the

conversation should be deferred. Pausing a few hours or even a few days in

cases where decisions do not have to be made immediately is sometimes the

best approach.

h. Making suggestions and questioning are not the same as criticizing, so don’t treat

them as if they are. A person making suggestions may not have concluded that

a mistake will be made—they could just be making doubly sure that the

person they’re talking to has taken all the risks into consideration. Asking

questions to make sure that someone hasn’t overlooked something isn’t the

same thing as saying that he or she has overlooked it (“watch out for the ice”

vs. “you’re being careless and not looking out for the ice”). Yet I often see

people react to constructive questions as if they were accusations. That is a

mistake.

4.4 If it is your meeting to run, manage the

conversation.

There are many reasons why meetings go poorly, but frequently it is because

of a lack of clarity about the topic or the level at which things are being

discussed (e.g., the principle/machine level, the case-at-hand level, or the

specific-fact level).

a. Make it clear who is directing the meeting and whom it is meant to serve. Every

meeting should be aimed at achieving someone’s goals; that person is the one

responsible for the meeting and decides what they want to get out of it and

how they will do so. Meetings without someone clearly responsible run a

high risk of being directionless and unproductive.

b. Be precise in what you’re talking about to avoid confusion. It is often best to

repeat a specific question to be sure both questioner and responder are crystal

clear on what is being asked and answered. In an email, this is often as simple

as cutting and pasting the questions into the body of the text.

c. Make clear what type of communication you are going to have in light of the

objectives and priorities. If your goal is to have people with different opinions

work through their differences to try to get closer to what is true and what to

do about it (open-minded debate), you will run your meeting differently than

if its goal is to educate. Debating takes time, and that time increases

exponentially depending on the number of people participating in the

discussion, so you have to carefully choose the right people in the right

numbers to suit the decision that needs to be made. In any discussion try to

limit the participation to those whom you value most in light of your

objectives. The worst way to pick people is based on whether their

conclusions align with yours. Group-think (people not asserting independent

views) and solo-think (people being unreceptive to the thoughts of others) are

both dangerous.

d. Lead the discussion by being assertive and open-minded. Reconciling different

points of view can be difficult and time-consuming. It is up to the meeting

leader to balance conflicting perspectives, push through impasses, and decide

how to spend time wisely.

A common question I get is: What happens when someone inexperienced

offers an opinion? If you’re running the conversation, you should be

weighing the potential cost in the time that it takes to explore their opinion

versus the potential gain in being able to assess their thinking and gain a

better understanding of what they’re like. Exploring the views of people who

are still building their track record can give you valuable insights into how

they might handle various responsibilities. Time permitting, you should work

through their reasoning with them so they can understand how they might be

wrong. It’s also your obligation to open-mindedly consider whether they’re

right.

e. Navigate between the different levels of the conversation. When considering an

issue or situation, there should be two levels of discussion: the case at hand

and the relevant principles that help you decide how the machine should

work. You need to clearly navigate between these levels in order to handle

the case well, test the effectiveness of your principles, and improve the

machine so similar cases will be handled better in the future.

f. Watch out for “topic slip.” Topic slip is random drifting from topic to topic

without achieving completion on any of them. One way to avoid it is by

tracking the conversation on a whiteboard so that everyone can see where

you are.

g. Enforce the logic of conversations. People’s emotions tend to heat up when

there is disagreement. Remain calm and analytical at all times; it is more

difficult to shut down a logical exchange than an emotional one. Remember

too that emotions can shade how people see reality. For example, people will

sometimes say, “I feel like (something is true)” and proceed as though it’s a

fact, when other people may interpret the same situation differently. Ask

them, “Is it true?” to ground the conversation in reality.

h. Be careful not to lose personal responsibility via group decision making. Too often

groups will make a decision to do something without assigning personal

responsibilities, so it is not clear who is supposed to follow up by doing what.

Be clear in assigning personal responsibilities.

i. Utilize the “two-minute rule” to avoid persistent interruptions. The two-minute

rule specifies that you have to give someone an uninterrupted two minutes to

explain their thinking before jumping in with your own. This ensures that

everyone has time to fully crystallize and communicate their thoughts

without worrying they will be misunderstood or drowned out by a louder

voice.

j. Watch out for assertive “fast talkers.” Fast talkers are people who articulately

and assertively say things faster than they can be assessed as a way of

pushing their agenda past other people’s examination or objections. Fast

talking can be especially effective when it’s used against people worried

about appearing stupid. Don’t be one of those people. Recognize that it’s

your responsibility to make sense of things and don’t move on until you do. If

you’re feeling pressured, say something like “Sorry for being stupid, but I’m

going to need to slow you down so I can make sense of what you’re saying.”

Then ask your questions. All of them.

k. Achieve completion in conversations. The main purpose of discussion is to

achieve completion and get in sync, which leads to decisions and/or actions.

Conversations that fail to reach completion are a waste of time. When there is

an exchange of ideas, it is important to end it by stating the conclusions. If

there is agreement, say it; if not, say that. Where further action has been

decided, get those tasks on a to-do list, assign people to do them, and specify

due dates. Write down your conclusions, working theories, and to-do’s in

places that will lead to their being used as foundations for continued progress.

To make sure this happens, assign someone to make sure notes are taken and

follow-through occurs.

There is no reason to get angry because you still disagree. People can have

a wonderful relationship and disagree about some things; you don’t have to

agree on everything.

l. Leverage your communication. While open communication is very important,

the challenge is to do it in a time-efficient way—you can’t have individual

conversations with everyone. It is helpful to identify easy ways of sharing,

like open emails posted on an FAQ board or sending around videotapes or

audio recordings of key meetings. (I call such approaches “leverage.”) The

challenges become greater the higher you go in the reporting hierarchy

because the number of people affected by your actions and who also have

opinions and/or questions grows so large. In such cases, you will need even

greater leverage and prioritization (for example by having some of the

questions answered by a well-equipped party who works for you or by asking

people to prioritize their questions by urgency or importance).

4.5 Great collaboration feels like playing jazz.

In jazz, there’s no script: You have to figure things out as you go along.

Sometimes you need to sit back and let others drive things; other times, you

blare it out yourself. To do the right thing at the right moment you need to

really listen to the people you’re playing with so that you can understand

where they’re going.

All great creative collaboration should feel the same way. Combining your

different skills like different instruments, improvising creatively, and at the

same time subordinating yourself to the goals of the group leads to playing

great music together. But it’s important to keep in mind what number of

collaborators will play well together: A talented duo can improvise

beautifully, as can a trio or quartet. But gather ten musicians and no matter

how talented they are, it’s probably going to be too many unless they’re

carefully orchestrated.

a. 1+1=3. Two people who collaborate well will be about three times as

effective as each of them operating independently, because each will see what

the other might miss—plus they can leverage each other’s strengths while

holding each other accountable to higher standards.

b. 3 to 5 is more than 20. Three to five smart, conceptual people seeking the

right answers in an open-minded way will generally lead to the best answers.

It may be tempting to convene a larger group, but having too many people

collaborate is counterproductive, even if the members of the larger group are

smart and talented. The symbiotic advantages of adding people to a group

grow incrementally (2+1=4.25) up to a point; beyond that, adding people

actually subtracts from effectiveness. That is because 1) the marginal benefits

diminish as the group gets larger (two or three people might be able to cover

most of the important perspectives, so adding more people doesn’t bring

much more) and 2) larger group interactions are less efficient than smaller

ones. Of course, what’s best in practice depends on the quality of the people

and the differences of the perspectives that they bring and how well the group

is managed.

4.6 When you have alignment, cherish it.

While there is nobody in the world who will share your point of view on

everything, there are people who will share your most important values and

the ways in which you choose to live them out. Make sure you end up with

those people.

4.7 If you find you can’t reconcile major differences

—especially in values—consider whether the

relationship is worth preserving.

There are all kinds of different people in the world, many of whom value

different kinds of things. If you find you can’t get in sync with someone on

shared values, you should consider whether that person is worth keeping in

your life. A lack of common values will lead to a lot of pain and other

harmful consequences and may ultimately drive you apart. It might be better

to head all that off as soon as you see it coming.

5 Believability Weight Your

Decision Making

In typical organizations, most decisions are made either autocratically, by a

top-down leader, or democratically, where everyone shares their opinions and

those opinions that have the most support are implemented. Both systems

produce inferior decision making. That’s because the best decisions are made

by an idea meritocracy with believability-weighted decision making, in which

the most capable people work through their disagreements with other capable

people who have thought independently about what is true and what to do

about it.

It is far better to weight the opinions of more capable decision makers

more heavily than those of less capable decision makers. This is what we

mean by “believability weighting.” So how do you determine who is capable

at what? The most believable opinions are those of people who 1) have

repeatedly and successfully accomplished the thing in question, and 2) have

demonstrated that they can logically explain the cause-effect relationships

behind their conclusions. When believability weighting is done correctly and

consistently, it is the fairest and the most effective decision-making system. It

not only produces the best outcomes but also preserves alignment, since even

people who disagree with the decision will be able to get behind it.

But for this to be the case, the criteria for establishing believability must

be objective and trusted by everybody. At Bridgewater everyone’s

believability is tracked and measured systematically, using tools such as

Baseball Cards and the Dot Collector that actively record and weigh their

experience and track records. In meetings we regularly take votes about

various issues via our Dot Collector app, which displays both the equal-

weighted average and the believability-weighted results (along with each

person’s vote).

Typically, if both the equal-weighted average and the believability-

weighted votes align, we consider the matter resolved and move on. If the

two types of votes are at odds, we try again to resolve them and, if we can’t,

we go with the believability-weighted vote. Depending on what type of

decision it is, in some cases, a single “Responsible Party” (RP) can override a

believability-weighted vote; in others, the believability-weighted vote

supersedes the RP’s decision. But in all cases believability-weighted votes

are taken seriously when there is disagreement. Even in cases in which the

RPs can overrule the believability- weighted vote, the onus is on the RP to try

to resolve the dispute before overruling it. In my forty years at Bridgewater, I

never made a decision contrary to the believability-weighted decision

because I felt that to do so was arrogant and counter to the spirit of the idea

meritocracy, though I argued like hell for what I thought was best.

To give you an example of what this process looks like in action, during

the spring of 2012 our research teams used believability- weighted decision

making to resolve a disagreement about what would happen next as the

European debt crisis was heating up. At that time, the borrowing and debt-

service needs of the governments of Italy, Ireland, Greece, Portugal, and

especially Spain had reached levels that far exceeded their abilities to pay.

We knew that the European Central Bank would either have to make

unprecedented purchases of government bonds or allow the debt crisis to

worsen to the point where defaults and the breakup of the Eurozone would

probably occur. Germany was adamantly opposed to a bailout. It was clear

that the fates of these countries’ economies, and of the Eurozone itself,

depended on how well Mario Draghi, the president of the European Central

Bank, orchestrated the ECB’s next move. But what would he do?

Like analyzing a chess board to visualize the implications and inclinations

of the different moves of the different players, each of us looked at the

situation from every angle. After a lot of discussion we remained split: About

half of us thought the ECB would print more money to buy the bonds and

about half thought they wouldn’t, because breaking with the Germans would

threaten the Eurozone even more. While such thoughtful and open exchanges

are essential, it’s also critical to have mutually agreed-upon ways of resolving

them to arrive at the best decision. So we used our believability-weighting

system to break the stalemate.

We did that using our Dot Collector tool, which helps us surface the

sources of our disagreements in people’s different thinking characteristics

and work our way through them based on their believabilities. People have

different believability weightings for different qualities, like expertise in a

particular subject, creativity, ability to synthesize, etc. These dots are

determined by a mixture of ratings, both from peers and tests of different

sorts. By looking at these attributes, and also understanding which thinking

qualities are most essential to the situation at hand, we can make the best

decisions.

In this case, we took a believability-weighted vote, with the qualities

chosen being both subject-matter expertise and ability to synthesize. Using

the Dot Collector, it became clear that those with greater believability

believed Draghi would defy Germany and print money, so that is what we

went with. A few days later, European policymakers announced a sweeping

plan to buy unlimited quantities of government bonds, so we got it right.

While the believability-weighted answer isn’t always the best answer, we

have found that it is more likely to be right than either the boss’s answer or

an equal-weighted referendum.

Regardless of whether or not you use this kind of technology and

structured process for believability weighting, the most important thing is that

you get the concept. Simply look down on yourself and your team when a

decision needs to be made and consider who is most likely to be right. I

assure you that, if you do, you will make better decisions than if you don’t.

5.1 Recognize that having an effective idea

meritocracy requires that you understand the

merit of each person’s ideas.

Having a hierarchy of merit is not only consistent with an idea meritocracy

but essential for it. It’s simply not possible for everyone to debate everything

all the time and still get their work done. Treating all people equally is more

likely to lead away from truth than toward it. But at the same time, all views

should be considered in an open-minded way, though placed in the proper

context of the experiences and track records of the people expressing them.

Imagine if a group of us were getting a lesson in how to play baseball

from Babe Ruth, and someone who’d never played the game kept

interrupting him to debate how to swing the bat. Would it be helpful or

harmful to the group’s progress to ignore their different track records and

experience? Of course it would be harmful and plain silly to treat their points

of view equally, because they have different levels of believability. The most

productive approach would be to allow Ruth to give his instructions

uninterrupted and then take some time afterward to answer questions. But

because I’m pretty extreme in believing that it is important to obtain

understanding rather than accepting doctrine at face value, I would encourage

the new batter not to accept what Ruth has to say as right just because he was

the greatest slugger of all time. If I were that new batter, I wouldn’t stop

questioning Ruth until I was confident I had found the truth.

a. If you can’t successfully do something, don’t think you can tell others how it should

be done. I have seen some people who have repeatedly failed at something

hold strongly to their opinions of how it should be done, even when their

opinions are at odds with those who have repeatedly done it successfully.

That is dumb and arrogant. They should instead ask questions and seek

believability-weighted votes to help them get out of their intransigence.

b. Remember that everyone has opinions and they are often bad. Opinions are easy

to produce; everyone has plenty of them and most people are eager to share

them—even to fight for them. Unfortunately many are worthless or even

harmful, including a lot of your own.

5.2 Find the most believable people possible who

disagree with you and try to understand their

reasoning.

Having open-minded conversations with believable people who disagree with

you is the quickest way to get an education and to increase your probability

of being right.

a. Think about people’s believability in order to assess the likelihood that their

opinions are good. While it pays to be open-minded, you also have to be

discerning. Remember that the quality of the life you get will depend largely

on the quality of the decisions that you make as you pursue your goals. The

best way to make great decisions is to know how to triangulate with other,

more knowledgeable people. So be discerning about whom you triangulate

with and skilled in the way you do it.

The dilemma you face is trying to understand as accurately as you can

what’s true in order to make decisions effectively while realizing many of the

opinions you will hear won’t be worth much, including your own. Think

about people’s believability, which is a function of their capabilities and their

willingness to say what they think. Keep their track records in mind.

b. Remember that believable opinions are most likely to come from people 1) who

have successfully accomplished the thing in question at least three times, and 2) who

have great explanations of the cause-effect relationships that lead them to their

conclusions. Treat those who have neither as not believable, those who have

one as somewhat believable, and those who have both as the most believable.

Be especially wary of those who comment from the stands without having

played on the field themselves and who don’t have good logic, as they are

dangerous to themselves and others.

c. If someone hasn’t done something but has a theory that seems logical and can be

stress-tested, then by all means test it. Keep in mind that you are playing

probabilities.

d. Don’t pay as much attention to people’s conclusions as to the reasoning that led

them to their conclusions. It is common for conversations to consist of people

sharing their conclusions rather than exploring the reasoning that led to those

conclusions. As a result, there is an overabundance of confidently expressed

bad opinions.

e. Inexperienced people can have great ideas too, sometimes far better ones than more

experienced people. That’s because experienced thinkers can get stuck in their

old ways. If you’ve got a good ear, you will be able to tell when an

inexperienced person is reasoning well. Like knowing whether someone can

sing, it doesn’t take a lot of time. Sometimes a person only has to sing a few

bars for you to hear how well they can sing. Reasoning is the same—it often

doesn’t take a lot of time to figure out if someone can do it.

f. Everyone should be up-front in expressing how confident they are in their thoughts.

A suggestion should be called a suggestion; a firmly held conviction should

be presented as such—particularly if it’s coming from someone with a strong

track record in the area in question.

5.3 Think about whether you are playing the role of

a teacher, a student, or a peer . . .

. . . and whether you should be teaching, asking questions, or debating. Too often

people flail in their disagreements because they either don’t know or don’t

think about how they should engage effectively; they just blurt out whatever

they think and argue. While everyone has the right and obligation to make

sense of everything, basic rules for engagement should be followed. Those

rules and how you should follow them depend on your relative

believabilities. For example, it would not be effective for the person who

knows less to tell the person who knows more how something should be

done. It’s important to get the balance between your assertiveness and your

open-mindedness right, based on your relative levels of understanding of the

subject.

Think about whether the person you’re disagreeing with is more or less

believable than you. If you are less believable, you are more of a student and

should be more open-minded, primarily asking questions in order to

understand the logic of the person who probably knows more. If you’re more

believable, your role is more of a teacher, primarily conveying your

understanding and answering questions. And if you are approximate peers,

you should have a thoughtful exchange as equals. When there is a

disagreement about who is more believable, be reasonable and work it

through. In cases when you can’t do this alone effectively, seek out the help

of an agreed-upon third party.

In all cases, try to see things through the other person’s eyes so that you

can obtain understanding. All parties should remember that the purpose of

debate is to get at truth, not to prove that someone is right or wrong, and that

each party should be willing to change their mind based on the logic and

evidence.

a. It’s more important that the student understand the teacher than that the teacher

understand the student, though both are important. I have often seen less

believable people (students) insist that the more believable people (teachers)

understand their thinking and prove why the teacher is wrong before listening

to what the teacher (the more believable party) has to say. That’s backward.

While untangling the student’s thinking can be helpful, it is typically difficult

and time-consuming and puts the emphasis on what the student sees instead

of on what the teacher wants to convey. For that reason, our protocol is for

the student to be open-minded first. Once the student has taken in what the

teacher has to offer, both student and teacher will be better prepared to

untangle and explore the student’s perspective. It is also more time-efficient

to get in sync this way, which leads to the next principle.

b. Recognize that while everyone has the right and responsibility to try to make sense

of important things, they must do so with humility and radical open-mindedness.

When you are less believable, start by taking on the role of a student in a

student-teacher relationship—with appropriate humility and open-

mindedness. While it is not necessarily you who doesn’t understand, you

must assume this until you have seen the issue through the other’s eyes. If the

issue still doesn’t make sense to you and you think that your teacher just

doesn’t get it, appeal to other believable people. If you still can’t reach an

agreement, assume you are wrong. If, on the other hand, you are able to

convince a number of believable people of your point of view, then you

should make sure your thinking is heard and considered by the person

deciding, probably with the help of the other believable parties. Remember

that those who are higher in the reporting hierarchy have more people they

are trying to sort through on an expected value basis to get the best thinking

and more people who want to tell them what they think, so they are time-

constrained and have to play the probabilities. If your thinking has been

stress-tested by other believable people who support you, it has a greater

probability of being heard. Conversely, those higher in the reporting

hierarchy must strive to achieve the goal of getting in sync with those lower

in the hierarchy about what makes sense. The more people get in sync about

what makes sense, the more capable and committed people will be.

5.4 Understand how people came by their opinions.

Our brains work like computers: They input data and process it in accordance

with their wiring and programming. Any opinion you have is made up of

these two things: the data and your processing or reasoning. When someone

says, “I believe X,” ask them: What data are you looking at? What reasoning

are you using to draw your conclusion?

Dealing with raw opinions will get you and everyone else confused;

understanding where they come from will help you get to the truth.

a. If you ask someone a question, they will probably give you an answer, so think

through to whom you should address your questions. I regularly see people ask

totally uninformed or nonbelievable people questions and get answers that

they believe. This is often worse than having no answers at all. Don’t make

that mistake. You need to think through who the right people are. If you’re in

doubt about someone’s believability, find out.

The same is true for you: If someone asks you a question, think first

whether you’re the right person to answer it. If you’re not believable, you

probably shouldn’t have an opinion about what they’re asking, let alone share

it.

Be sure to direct your comments or questions to the believable

Responsible Party or Parties for the issues you want to discuss. Feel free to

include others if you think that their input is relevant, while recognizing that

the decision will ultimately rest with whoever is responsible for it.

b. Having everyone randomly probe everyone else is an unproductive waste of time.

For heaven’s sake don’t bother directing your questions to people who aren’t

responsible or, worse still, throw your questions out there without directing

them at all.

c. Beware of statements that begin with “I think that . . .” Just because someone

thinks something doesn’t mean it’s true. Be especially skeptical of statements

that begin with “I think that I . . .” since most people can’t accurately assess

themselves.

d. Assess believability by systematically capturing people’s track records over time.

Every day is not a new day. Over time, a body of evidence builds up,

showing which people can be relied on and which cannot. Track records

matter, and at Bridgewater tools such as Baseball Cards and the Dot Collector

make everyone’s track records available for scrutiny.

5.5 Disagreeing must be done efficiently.

Working oneself through disagreements can be time-consuming, so you can

imagine how an idea meritocracy—where disagreement is not just tolerated

but encouraged—could become dysfunctional if it’s not managed well.

Imagine how inefficient it would be if a teacher ran a large class by asking

each of the students individually what they thought, and then debated with all

of them, instead of conveying their own views first and taking questions later.

People who want to disagree must keep this in mind and follow the tools

and protocols for disagreeing well.

a. Know when to stop debating and move on to agreeing about what should be done. I

have seen people who agree on the major issues waste hours arguing over

details. It’s more important to do big things well than to do the small things

perfectly. But when people disagree on the importance of debating

something, it probably should be debated. Operating otherwise would

essentially give someone (typically the boss) a de facto veto.

b. Use believability weighting as a tool rather than a substitute for decision making by

Responsible Parties. Believability-weighted decision making is a way of

supplementing and challenging the decisions of Responsible Parties, not

overruling them. As Bridgewater’s system currently exists, everyone is

allowed to give input, but their believability is weighted based on the

evidence (their track records, test results, and other data). Responsible Parties

can overrule believability-weighted voting but only at their peril. When a

decision maker chooses to bet on his own opinion over the consensus of

believable others, he is making a bold statement that will be proven right or

wrong by the results.

c. Since you don’t have the time to thoroughly examine everyone’s thinking yourself,

choose your believable people wisely. Generally speaking, it’s best to choose

three believable people who care a lot about achieving the best outcome and

who are willing to openly disagree with each other and have their reasoning

probed. Of course the number three isn’t set in stone; the group could be

larger or smaller. Its ideal size depends on the amount of time available, how

important the decision is, how objectively you can assess your own and

others’ decision-making abilities, and how important it is to have a lot of

people understand the reasoning behind the decision.

d. When you’re responsible for a decision, compare the believability- weighted

decision making of the crowd to what you believe. When they’re at odds, you

should work hard to resolve the disagreement.

If you are about to make a decision that the believability-weighted

consensus thinks is wrong, think very carefully before you proceed. It’s likely

that you’re wrong, but even if you’re right, there’s a good chance that you’ll

lose respect by overruling the process. You should try hard to get in sync, and

if you still can’t do that, you should be able to put your finger on exactly

what it is you disagree with, understand the risks of being wrong, and clearly

explain your reasons and logic to others. If you can’t do those things, you

probably should suspend your own judgment and go with the believability-

weighted vote.

5.6 Recognize that everyone has the right and

responsibility to try to make sense of important

things.

There will come a point in all processes of thinking things through when you

are faced with the choice of requiring the person who sees things differently

from you to slowly work things through until you see things the same way, or

going along with the other person, even though their thinking still doesn’t

seem to make sense. I recommend the first path when you are disagreeing

about something important and the latter when it’s unimportant. I understand

that the first path can be awkward because the person you are speaking to can

get impatient. To neutralize that I suggest you simply say, “Let’s agree that I

am a dumb shit but I still need to make sense of this, so let’s move slowly to

make sure that happens.”

One should always feel free to ask questions, while remembering one’s

obligation to remain open-minded in the discussions that follow. Record your

argument so that if you can’t get in sync or make sense of things, you can

send it out so others can decide. And of course, remember that you are

operating in an idea meritocracy—be mindful of your own believability.

a. Communications aimed at getting the best answer should involve the most relevant

people. As a guide, the most relevant people to probe are your managers,

direct reports, and/or agreed experts. They are the most impacted by and most

informed about the issues under discussion, and so they are the most

important parties to be in sync with. If you can’t get in sync, you should

escalate the disagreement by raising it to the appropriate people.

b. Communication aimed at educating or boosting cohesion should involve a broader

set of people than would be needed if the aim were just getting the best answer. Less

experienced, less believable people may not be necessary to decide an issue,

but if the issue involves them and you aren’t in sync with them, that lack of

understanding will in the long run likely undermine morale and the

organization’s efficiency. This is especially important in cases where you

have people who are both not believable and highly opinionated (the worst

combination). Unless you get in sync with them, you will drive their

uninformed opinions underground. If, on the other hand, you are willing to be

challenged, you will create an environment in which all criticisms are aired

openly.

c. Recognize that you don’t need to make judgments about everything. Think about

who is responsible for something (and their believability), how much you

know about it, and your own believability. Don’t hold opinions about things

you don’t know anything about.

5.7 Pay more attention to whether the decision-

making system is fair than whether you get your

way.

An organization is a community with a set of shared values and goals. Its

morale and smooth functioning should always take precedence over your

need to be right—and besides, you could be wrong. When the decision-

making system is consistently well-managed and based on objective criteria,

the idea meritocracy is more important than the happiness of any one of its

members—even if that member is you.

38 The most appropriate people are either the people you both report to (which we call the

point of the pyramid in an organizational chart) or someone you mutually agree will be a

good arbiter.

6 Recognize How to Get Beyond

Disagreements

It is the rare dispute that is resolved to both parties’ equal satisfaction.

Imagine you are having an argument with your neighbor about a tree of theirs

that has fallen onto your property. Who is responsible for its removal? Who

owns the firewood? Who pays for the damage? While you might not be able

to resolve the disagreement yourselves, the legal system has procedures and

guidelines that allow it to determine what’s true and what to do about it, and

once it renders its judgment it’s done, even if one of you didn’t get what you

wanted. That’s just the way life is.

At Bridgewater, our principles and policies work in essentially the same

way, providing a path for settling disputes that’s not unlike what you’d find

in the courts (though it’s less formal). Having such a system is essential in an

idea meritocracy, because you can’t just encourage people to think

independently and fight for what they believe is true. You also have to

provide them with a way to get past their disagreements and move forward.

Managing this well is especially important at Bridgewater because we

have so much more thoughtful disagreement than other places. While in most

cases people disagreeing can work things out on their own, it is still often the

case that people can’t agree on what’s true and what to do about it. In those

cases, we follow our procedures for believability-weighted voting and go

with the verdict; or, in the cases where the RP wants to do it his/her way

contrary to the vote and has the power to do so, we accept that and move on.

In the end, people who join our idea meritocracy agree to abide by our

policies and procedures and the decisions that come out of them, just as if

they had taken a dispute to court and had to abide by its procedures and the

resulting verdict. This requires them to separate themselves from their own

opinion and avoid getting angry when a decision doesn’t go their way. If

people don’t follow the agreed-upon paths, they don’t have the right to

complain about either the people they disagree with or the idea-meritocratic

system itself.

In those rare cases where our principles, policies, and procedures fail to

make clear how a disagreement should be resolved, it is everyone’s

responsibility to raise that fact so the process can be clarified and improved.

6.1 Remember: Principles can’t be ignored by

mutual agreement.

Principles are like laws—you can’t break one simply because you and

someone else agree to break it. Remember that it’s everyone’s obligation to

speak up, own it, or get out. If you don’t think the principles provide the right

way to resolve a problem or disagreement, you need to fight to change the

principles, not just do what you want to do.

a. The same standards of behavior apply to everyone. Whenever there is a dispute,

both parties are required to have equal levels of integrity, to be open-minded

and assertive, and to be equally considerate. The judges must hold the parties

to the same standards and provide feedback consistent with these standards. I

have often seen cases in which the feedback wasn’t appropriately balanced

for various reasons (to hold the stronger performer to a higher standard, to

spread the blame). This is a mistake. The person in the wrong needs to

receive the strongest message. Not operating this way could lead them to

believe that the problem wasn’t caused by them, or was caused by both

parties equally. Of course, the message should be conveyed calmly and

clearly rather than emotionally to maximize its effectiveness.

6.2 Make sure people don’t confuse the right to

complain, give advice, and openly debate with

the right to make decisions.

Everyone does not report to everyone. Responsibilities and authorities are

assigned to individuals based on assessments of their ability to handle them.

People are given the authority that they need to achieve outcomes and are

held accountable for their ability to produce them.

At the same time, they are going to be stress-tested from both directions—

i.e., by those they report to and by those who report to them. The challenging

and probing that we encourage is not meant to second-guess their every

decision but to improve the quality of their work over time. The ultimate goal

of independent thinking and open debate is to provide the decision maker

with alternative perspectives. It doesn’t mean that decision-making authority

is transitioned to those who are probing them.

a. When challenging a decision and/or a decision maker, consider the broader context.

It’s important to view individual decisions in the broadest possible context.

For example, if the Responsible Party being challenged has a vision, and the

decision being disputed involves a small detail of that overall vision, the

decision needs to be debated and evaluated within the context of that larger

vision.

6.3 Don’t leave important conflicts unresolved.

While it’s easier to avoid confrontations in the short run, the consequences of

doing so can be massively destructive in the long term. It’s critical that

conflicts actually get resolved—not through superficial compromise, but

through seeking the important, accurate conclusions. In most cases, this

process should be made transparent to relevant others (and sometimes the

entire organization), both to ensure quality decision making and to perpetuate

the culture of openly working through disputes.

a. Don’t let the little things divide you when your agreement on the big things should

bind you. Almost every group that agrees on the big things ends up fighting

about less important things and becoming enemies even though they should

be bound by the big things. This phenomenon is called the narcissism of

small differences. Take the Protestants and Catholics. Though both are

followers of Christ, some of them have been fighting for hundreds of years,

even though many of them are unable to articulate the differences that divide

them, and most of those who can articulate the differences realize that they

are insignificant relative to the big important things that should bind them

together. I once saw a close family have an irrevocable blow-out at a

Thanksgiving dinner over who would cut the turkey. Don’t let this narcissism

of small differences happen to you. Understand that nobody and nothing is

perfect and that you are lucky to have by-and-large excellent relationships.

See the big picture.

b. Don’t get stuck in disagreement—escalate or vote! By practicing open-

mindedness and assertiveness, you should be able to resolve most

disagreements. If not, and if your dispute is one-on-one, you should escalate

to a mutually agreed-upon believable other. All things being equal, that

should be someone higher in your reporting chain, such as your boss. When a

group can’t reach an agreement, the person responsible for the meeting

should take a believability-weighted vote.

6.4 Once a decision is made, everyone should get

behind it even though individuals may still

disagree.

A decision-making group in which those who don’t get what they want

continue to fight rather than work for what the group has decided is destined

to fail—you can see this happening all the time in companies, organizations,

and even political systems and nations. I’m not saying that people should

pretend they like the decision if they don’t, or that the matter in question

can’t be revisited at a future date. What I am saying is that in order to be

effective, all groups that work together have to operate with protocols that

allow time for disagreements to be explored, but in which dissenting minority

parties recognize that group cohesion supersedes their individual desires once

they have been overruled.

The group is more important than the individual; don’t behave in a way

that undermines the chosen path.

a. See things from the higher level. You are expected to go to the higher level

and look down on yourself and others as part of a system. In other words, you

must get out of your own head, consider your views as just some among

many, and look down on the full array of points of view to assess them in an

idea-meritocratic way rather than just in your own possessive way. Seeing

things from the higher level isn’t just seeing other people’s point of view; it’s

also being able to see every situation, yourself, and others in the situation as

though you were looking down on them as an objective observer. If you can

do this well, you will see the situation as “another one of those,” see it

through everyone’s eyes, and have good mental maps or principles for

deciding how to handle it.

Almost all people initially find it difficult to get beyond seeing things

through just their own eyes, so I’ve developed policies and tools such as the

Coach (which connects situations to principles) that help people do this. With

practice many people can learn to develop this perspective, though others

never do. You need to know which type of person you and the people around

you are. If you can’t do this well on your own, seek the help of others.

Recognize that many people cannot see things from the higher level and

distinguish those who can from those who can’t, and either get rid of those

who can’t or have good guardrails in place to protect yourself and the

organization against this inability.

By the way, it is of course okay to continue to disagree on some things as

long as you don’t keep fighting, thereby undermining the idea meritocracy. If

you continue to fight the idea meritocracy, you must go.

b. Never allow the idea meritocracy to slip into anarchy. In an idea meritocracy,

there is bound to be more disagreement than in a typical organization, but

when it’s taken to an extreme, arguing and nitpicking can undermine the idea

meritocracy’s effectiveness. At Bridgewater, I have encountered some

people, especially junior people, who mistakenly think they are entitled to

argue about whatever they want and with whomever they please. I have even

seen people band together to threaten the idea meritocracy, claiming that their

right to do so comes from the principles. They misunderstand my principles

and the boundaries within the organization. They must abide by the rules of

the system, which provide paths for resolving disagreements, and they

mustn’t threaten the system.

c. Don’t allow lynch mobs or mob rule. Part of the purpose of having a

believability-weighted system is to remove emotion from decision making.

Crowds get emotional and seek to grab control. That must be prevented.

While all individuals have the right to have their own opinions, they do not

have the right to render verdicts.

6.5 Remember that if the idea meritocracy comes

into conflict with the well-being of the

organization, it will inevitably suffer.

That’s just a matter of practicality. As you know I believe that what’s good

must work well, and that having the organization work well is of paramount

importance.

a. Declare “martial law” only in rare or extreme circumstances when the principles

need to be suspended. While all these principles exist for the well-being of the

community, there may come times when adhering to them could threaten the

community’s well-being. For example, we encountered a time when there

were leaks to the media of some things that we made radically transparent

within Bridgewater. People at Bridgewater understood that our transparency

about our weaknesses and mistakes was being used to present distorted and

harmful pictures of Bridgewater, so we had to lessen our level of

transparency until we resolved that problem. Rather than just lessening this

degree of transparency, I explained the situation and declared “martial law,”

meaning that this was a temporary suspension of the full degree of radical

transparency. That way, everyone would know both that it was an exceptional

case and that we were entering a time when the typical way of operating

would be suspended.

b. Be wary of people who argue for the suspension of the idea meritocracy for the

“good of the organization.” When such arguments win out, the idea meritocracy

will be weakened. Don’t let that happen. If people respect the rules of the

idea meritocracy, there will be no conflict. I know that from my experiences

over decades. However, I also know that there will be people who put what

they want above the idea meritocracy and threaten it. Consider those people

to be enemies of the system and get rid of them.

6.6 Recognize that if the people who have the power

don’t want to operate by principles, the

principled way of operating will fail.

Ultimately, power will rule. This is true of any system. For example, it has

repeatedly been shown that systems of government have only worked when

those with the power value the principles behind the system more than they

value their own personal objectives. When people have both enough power to

undermine a system and a desire to get what they want that is greater than

their desire to maintain the system, the system will fail. For that reason the

power supporting the principles must be given only to people who value the

principled way of operating more than their individual interests (or the

interests of their faction), and people must be dealt with in a reasonable and

considerate way so that the overwhelming majority will want and fight for

that principle-based system.

TO GET THE PEOPLE

RIGHT . . .

While we talked about an organization’s culture in the last section, its people

are even more important because they can change the culture for better or for

worse. A culture and its people are symbiotic—the culture attracts certain

kinds of people and the people in turn either reinforce or evolve the culture

based on their values and what they’re like. If you choose the right people

with the right values and remain in sync with them, you will play beautiful

jazz together. If you choose the wrong people, you will all go over the

waterfall together.

Steve Jobs, who everyone thought was the secret to Apple’s success, said,

“The secret to my success is that we’ve gone to exceptional lengths to hire

the best people in the world.” I explain this concept in the next chapter,

Remember That the WHO Is More Important than the WHAT. Anyone who

runs a successful organization will tell you the same.

Yet most organizations are bad at recruiting. It starts with interviewers

picking people they like and who are like them instead of focusing on what

people are really like and how well they will fit in their jobs and careers. As I

describe in Chapter Eight, Hire Right, Because the Penalties for Hiring

Wrong Are Huge, to hire well, one needs a more scientific process that

precisely matches people’s values, abilities, and skills with the organization’s

culture and its career paths. You and your candidate need to get to know each

other. You have to let them interview your organization and you have to

honestly convey to them what it’s like, warts and all, and be crystal clear

about what you can expect from each other.

But even then, after you both say yes, you won’t know if you have a good

fit until you’ve lived together in your work and your relationships for a while.

The “interviewing” process doesn’t end when employment begins, but

transitions into a rigorous process of training, testing, sorting, and most

importantly, getting in sync, which I describe in Chapter Nine, Constantly

Train, Test, Evaluate, and Sort People.

I believe that the ability to objectively self-assess, including one’s own

weaknesses, is the most influential factor in whether a person succeeds, and

that a healthy organization is one in which people compete not so much

against each other as against the ways in which their lower-level selves get in

the way. Your goal should be to hire people who understand this, equip them

with the tools and the information they need to flourish in their jobs, and not

micromanage them. If they can’t do the job after being trained and given time

to learn, get rid of them; if they can, promote them.

7 Remember That the WHO Is

More Important than the

WHAT

People often make the mistake of focusing on what should be done while

neglecting the more important question of who should be given the

responsibility for determining what should be done. That’s backward. When

you know what you need in a person to do the job well and you know what

the person you’re putting into it is like, you can pretty well visualize how

things will go.

I remember one case where one of our most talented rising executives was

putting together a transition plan so that he could move on to another role. He

arrived at a meeting with the Management Committee with binders full of

process flows and responsibility maps, detailing every aspect of the area he’d

been responsible for, and explained how he’d automated and systemized as

much of it as possible to make it foolproof. It was an impressive presentation,

but it quickly became clear that he didn’t have an answer for who was going

to take his place and what would happen if they saw things differently and

put together a different plan. Who would oversee the machine he’d built,

probe it for problems, and constantly improve it or decide to get rid of it?

What qualities would such a person need to produce the same excellent

results that he had—i.e., what were the important job specifications we

should match the person against? Where would we go to recruit such a

person?

While these kinds of questions seem obvious in retrospect, time and again

I see people overlooking them. Not knowing what is required to do the job

well and not knowing what your people are like is like trying to run a

machine without knowing how its parts work together.

When I was younger I didn’t really understand the saying, “Hire someone

better than you.” Now, after decades of hiring, managing, and firing people, I

understand that to be truly successful I need to be like a conductor of people,

many of whom (if not all) can play their instruments better than I can—and

that if I was a really great conductor, I would also be able to find a better

conductor than me and hire him or her. My ultimate goal is to create a

machine that works so well that I can just sit back and watch beauty happen.

I cannot emphasize enough how important the selection, training, testing,

evaluation, and sorting out of people is.

In the end, what you need to do is simple:

1. Remember the goal.

2. Give the goal to people who can achieve it (which is best) or tell them

what to do to achieve it (which is micromanaging and therefore less

good).

3. Hold them accountable.

4. If they still can’t do the job after you’ve trained them and given them

time to learn, get rid of them.

7.1 Recognize that the most important decision for

you to make is who you choose as your

Responsible Parties.

If you put your goals in the hands of RPs who can execute those goals well,

and if you make it clear to them that they are personally responsible for

achieving those goals and doing the tasks, they should produce excellent

results.

The same goes for yourself. If your designer/manager-you doesn’t have a

good reason to be confident that your worker-you is up to a given task, it

would be crazy to let yourself do the task without seeking the supervision of

believable parties. You know that there are a lot of incompetent people in the

world trying to do things they’re not good at, so the chances are good that

you are one of them. That’s just a reality and it’s okay for you to accept it and

deal with it in a way that produces good outcomes.

a. Understand that the most important RPs are those responsible for the goals,

outcomes, and machines at the highest levels. Give me someone who can be

responsible for an entire area—someone who can design, hire, and sort to

achieve the goal—and I can be comfortable things will go well. These are the

most important people to choose and manage well. Senior managers must be

capable of higher-level thinking, and understand the difference between goals

and tasks—otherwise you will have to do their jobs for them. The ability to

see and value goals is largely innate, though it improves with experience. It

can be tested for, though no tests are perfect.

7.2 Know that the ultimate Responsible Party will be

the person who bears the consequences of what

is done.

So long as you bear the consequences of failure, you are the ultimate

Responsible Party. For example, while you might choose to delegate the

responsibility of figuring out how to handle your illness to a doctor, it is your

responsibility to pick the right one, since you will bear the consequences if he

does a bad job. Or if you were building a house, would you go to an architect

and say “show me the kinds of houses I can build” or would you tell the

architect what kind of house you want to live in? This is especially true when

it comes to money. If you delegate the oversight responsibility for your

finances to others, they typically won’t hold themselves as accountable for

your money as they would their own and they won’t fire themselves if they

are doing a bad job. Only the ultimate RP can do that.

When putting someone in a position of responsibility, make sure their

incentives are aligned with their responsibilities and they experience the

consequences of the outcomes they produce. As an example, structure their

deals so that they do well or badly based on how well or badly you do in the

areas they are responsible for. This is fundamental for good management.

a. Make sure that everyone has someone they report to. Even a company’s owners

have bosses, in their case, the investors whose money is being spent to

achieve their goals. If the owners are self-funded, they still have to make their

clients and employees happy. And they can’t escape the responsibility of

making sure that their costs are acceptable and their goals are being met.

Even if a person’s job is unique, someone needs to be holding them

accountable at all times.

7.3 Remember the force behind the thing.

Most people see the things around them without considering the forces that

created them. In most cases those forces were specific people with specific

qualities who worked in specific ways. Change the people and you change

how things develop; replace creators with noncreators and you stop having

creations.

People tend to personify organizations (“Apple is a creative company”)

while mistakenly depersonalizing their results, thus losing sight of who did

what to produce them. That’s misguided because companies don’t make

decisions—people do.

So who are the people in your organization behind the results and culture

that make it special? Think about who they are and how they work together

to make it what it is.

8 Hire Right, Because the

Penalties for Hiring Wrong

Are Huge

Remember back in Understand That People Are Wired Very Differently

when I described Bridgewater’s hit-or-miss hiring practices in its early days?

At the very beginning, we just hired people we liked. But too many of them

turned out to be bad fits. Because we liked them, we were reluctant to give up

on them, and things often went from bad to worse. So we started hiring like

most companies do, by looking at résumés, narrowing the lists, and then

interviewing to get a gut feel for who was right. But the questions we asked

our candidates, unlike the questions on a scientifically constructed

personality test, were unlikely to elicit answers truly indicative of what they

were like.

What we were doing, essentially, was looking at prospective employees

through our own biased perspectives. Those of us who were linear thinkers

tended to want to hire linear thinkers; those of us who were lateral thinkers

tended to want to hire lateral thinkers. We all thought the type we chose

would perform best in all jobs, and as a result we weren’t able to accurately

predict who would succeed and who would fail in our very unusual

environment. As a result, we continued to make a lot of bad hires.

Eventually we learned from our mistakes and failures that we could

improve our hiring results in two ways: 1) by always being crisp and clear on

exactly what kind of person we were looking for, and 2) by developing our

vocabulary for and means of evaluating people’s abilities at a much more

granular level. This chapter lays out in detail the principles we’ve learned for

doing this. While we still make too many hiring mistakes, we have

significantly reduced the odds of making them by following these processes,

which we continually try to improve.

At a high level, we look for people who think independently, argue open-

mindedly and assertively, and above all else value the intense pursuit of truth

and excellence, and through it, the rapid improvement of themselves and the

organization. Because we treat work as more than just what we do to make a

living, we look at every potential hire not just as an employee but as someone

we’d want share our lives with. We insist that the people we work with are

considerate and have a high sense of personal accountability to do the

difficult, right things. We look for people with generous natures and high

standards of fairness. Most important, they must be able to put their egos

aside and assess themselves candidly.

Whether you choose to look for these same traits or others, the most

important thing you can do is understand that hiring is a high-risk gamble that

needs to be approached deliberately. A lot of time, effort, and resources go

into hiring and developing new employees before it’s clear whether or not

they are good fits. Months or even years and countless dollars can be wasted

in training and retraining. Some of those costs are intangible, including loss

of morale and a gradual diminishment of standards as people who aren’t

excellent in their roles bump into each other; other costs from bad outcomes

can be measured all too easily in dollars and cents. So whenever you think

you are ready to make someone an offer, think one last time about the

important things that might go wrong and what else you can do to better

assess those risks and raise your probability of being right.

8.1 Match the person to the design.

When building a “machine,” design precedes people because the type of

people you will need will depend on the design. As you design, create a clear

mental image of the attributes required for each person to do their job well. It

is futile to give responsibilities to people who do not have the qualities

required to succeed. It frustrates, and inevitably angers, all parties, which is

damaging to the environment.

In order to match a person to the design, start by creating a spec sheet so

that there will be a consistent set of criteria that can be applied from

recruiting through performance reviews. Bridgewater’s spec sheets use the

same bank of qualities as our Baseball Cards.

Don’t design jobs to fit people; over time, this almost always turns out to

be a mistake. This often happens when someone you are reluctant to let go

doesn’t work out, and there is an inclination to try to find out what else that

person can do. Frequently managers fail to be objective about their own

strengths and weaknesses, and put themselves into roles that they’re not a

click for.

a. Think through which values, abilities, and skills you are looking for (in that order).

Values are the deep-seated beliefs that motivate behaviors and determine

people’s compatibilities with each other. People will fight for their values,

and they are likely to fight with people who don’t share them. Abilities are

ways of thinking and behaving. Some people are great learners and fast

processors; others possess the ability to see things at a higher level. Some

focus more on the particulars; still others think creatively or logically or with

supreme organization. Skills are learned tools, such as being able to speak a

foreign language or write computer code. While values and abilities are

unlikely to change much, most skills can be acquired in a limited amount of

time (e.g., software proficiency can be learned) and often change in worth

(today’s most in-demand programming language is likely to be obsolete in a

few years).

It is important for you to know what mix of qualities is impor-tant to fit

each role and, more broadly, what values and abilities are required in people

with whom you can have successful relationships. In picking people for long-

term relationships, values are most important, abilities come next, and skills

are the least important. Yet most people make the mistake of choosing skills

and abilities first and overlooking values. We value people most who have

what I call the three C’s: character, common sense, and creativity.

If your people are bound by a sense of community and mission and they

are capable, you will have an extraordinary organization. Some people will

value the mission and community and others won’t. Since at Bridgewater the

key shared values that maintain our culture are meaningful work and

meaningful relationships, radical truth and radical transparency, an open-

minded willingness to explore harsh realities including one’s own

weaknesses, a sense of ownership, a drive for excellence, and the willingness

to do the good but difficult things, we look for highly capable people who

deeply want all of those things.

b. Make finding the right people systematic and scientific. The process for

choosing people should be systematically built out and evidence-based. You

need to have a people-hiring machine in which the goals are clearly stated so

that the outcomes can be compared with them and the machine (the design

and the people) producing the outcomes can evolve to improve.

Organizations typically hire people by having job candidates’ resumes

reviewed by semi-random people based on semi-random criteria, which leads

them to invite in candidates to have semi-random groups of people ask the

candidates semi-random questions and then make their choices of whom to

offer jobs based on the consensus of how they liked them. You need to make

sure that each one of those steps is done more systematically and

purposefully. For example, you should think through what questions are

asked and how the different answers candidates give differentiate them in the

ways that you are seeking to differentiate them. You should also save all of

those answers so you can learn about how indicative they might be of

subsequent behaviors and performance. I do not mean that the human

dimension or art of the hiring process should be eliminated—the personal

values and esprit de corps part of a relationship are critically important and

can’t be fully measured by data. Sometimes the twinkle in the eye and the

facial expressions are telling. However, even for those areas where people’s

subjective interpretations are important, you can still use data and a scientific

approach to be more objective—for example, you can capture data to assess

the track records of those making the interpretations.

c. Hear the click: Find the right fit between the role and the person.Remember that

your goal is to put the right people in the right design. First understand the

responsibilities of the role and the qualities needed to fulfill them, then

ascertain whether an individual has them. When you’re doing this well, there

should almost be an audible “click” as the person you’re hiring fits into his or

her role.

d. Look for people who sparkle, not just “any ol’ one of those.” Too many people

get hired because they are just “one of those.” If you’re looking for a plumber

you might be inclined to fill the job with the first experienced plumber you

interview, without ascertaining whether he has the qualities of an outstanding

plumber. Yet the difference between an ordinary plumber versus an

outstanding one is huge. When reviewing any candidate’s background, you

must identify whether they have demonstrated themselves to be extraordinary

in some way. The most obvious demonstration is outstanding performance

within an outstanding peer group. If you’re less than excited to hire someone

for a particular job, don’t do it. The two of you will probably make each other

miserable.

e. Don’t use your pull to get someone a job. It is unacceptable to use your personal

influence to help someone get a job because doing so undermines the

meritocracy. It’s not good for the job seeker, because it conveys they did not

really earn it; it is not good for the person doing the hiring, because it

undermines their authority; and it is not good for you because it demonstrates

you will compromise merit for friends. It is an insidious form of corruption

and it must not be tolerated. The most you can do at Bridgewater in this

respect is to provide a reference for someone you know well enough to

endorse. Even though Bridgewater is my company, I have never deviated

from this policy.

8.2 Remember that people are built very differently

and that different ways of seeing and thinking

make people suitable for different jobs.

Some ways of thinking will serve you well for some purposes and serve you

poorly for others. It is highly desirable to understand one’s own and others’

ways of thinking and their best applications. Some qualities are more suitable

for some jobs. For example, you might not want to hire a highly introverted

person as a salesman. That’s not to say an introvert can’t do that job; it’s just

that a gregarious person is likely to be more satisfied in the role and do a

better job.

If you’re not naturally good at one type of thinking, it doesn’t mean you’re

precluded from paths that require it. It does, however, require that you either

work with someone who has that required way of thinking (which works

best) or learn to think differently (which is difficult or even impossible).

On the other hand, sometimes I see people dealing with each other,

especially in groups, without regard for these differences. They are like the

parable of the blind men touching different parts of an elephant and arguing

about what it is. Just think about how much better it would be if people were

open-minded enough to realize that none of them have the complete picture.

Both people expressing their own views and those considering others’ views

need to take each other’s differences into account. These differences are real,

so it’s dumb to pretend they don’t exist.

a. Understand how to use and interpret personality assessments. Personality

assessments are valuable tools for getting a quick picture of what people are

like in terms of their abilities, preferences, and style. They are often more

objective and reliable than interviews.

b. Remember that people tend to pick people like themselves, so choose interviewers

who can identify what you are looking for. If you’re looking for a visionary, pick

a visionary to do the interview in which you probe for vision. If you are

looking for a mix of qualities, assemble a group of interviewers who embody

those qualities collectively. Don’t choose interviewers whose judgment you

don’t trust (in other words, make sure they are believable).

c. Look for people who are willing to look at themselves objectively.

Everybody has strengths and weaknesses. The key to success is

understanding one’s weaknesses and successfully compensating for them.

People who lack that ability fail chronically.

d. Remember that people typically don’t change all that much. This is especially

true over short periods of time like a year or two, yet most people want to

assume that when someone does something wrong the person will learn the

lesson and change. That’s naive. It is best to assume that they won’t change

unless there is good evidence to the contrary that they will.

It’s better to bet on changes you have seen than those you hope for.

8.3 Think of your teams the way that sports

managers do: No one person possesses

everything required to produce success, yet

everyone must excel.

Teams should operate like those in professional sports, where different skills

are required to play different positions. Excellence in each is mandatory, the

success of the mission is uncompromisable, and members that don’t measure

up may need to be cut. When teams operate with such high standards and

shared values, extraordinary relationships are likely to develop.

8.4 Pay attention to people’s track records.

People’s personalities are pretty well formed before they come to you, and

they’ve been leaving their fingerprints all over the place since childhood;

anyone is fairly knowable if you do your homework. You have to get at their

values, abilities, and skills: Do they have a track record of excellence in what

you’re expecting them to do? Have they done the thing you want them to do

successfully at least three times? If not, you’re making a lower-probability

bet, so you want to have really good reasons for doing so. That doesn’t mean

you should never allow yourself or others to do anything new; of course you

should. But do it with appropriate caution and with guardrails. That is, have

an experienced person oversee the inexperienced person, yourself included (if

you fit that description).

a. Check references. Don’t rely exclusively on the candidate for information

about their track record: Talk to believable people who know them, look for

documented evidence, and ask for past reviews from their bosses,

subordinates, and peers. As much as possible, you want to get a clear and

objective picture of the path that they have chosen for themselves and how

they have evolved along the way. I’ve seen plenty of people who claimed to

be successful elsewhere operate ineffectively at Bridgewater. A closer look

often revealed that they were either not as successful as they portrayed

themselves or they got credit for others’ accomplishments.

b. Recognize that performance in school doesn’t tell you much about whether a

person has the values and abilities you are looking for. Largely because they are

the easiest to measure, memory and processing speed tend to be the abilities

that determine success in school, so school performance is an excellent gauge

of these qualities. School performance is also a good gauge of a person’s

determination to succeed, as well as their willingness and ability to follow

directions. But when it comes to assessing a candidate’s common sense,

vision, creativity, or decision-making abilities, school records are of limited

value. Since those traits are the most important, you must look beyond school

to ascertain whether an applicant has them.

c. While it’s best to have great conceptual thinkers, understand that great experience

and a great track record also count for a lot. There are all sorts of jobs and they

require all types of people to handle them. I am frequently biased toward

finding the entrepreneur type—a clever, open-minded scrapper who will find

the best solution—and I have often been disappointed. On the other hand,

sometimes I have found a master craftsman who has devoted decades to his

specialty who I could completely rely on. What keeps coming to my mind is

Malcolm Gladwell’s rule that it takes ten thousand hours of doing something

to build expertise—and the value of looking at batting averages to judge how

well a person can hit. One way you can tell how well a talented rookie will do

relative to a proven star is to get them into a debate with each other and see

how well they each hold up.

d. Beware of the impractical idealist. Idealistic people who have moralistic

notions about how people should behave without understanding how people

really do behave do more harm than good.

As a global macroeconomist and businessman and as a philanthropist I

have seen this repeatedly in all those domains. I have come to believe that as

well-intentioned as they are, impractical idealists are dangerous and

destructive, whereas practical idealists make the world a better place. To be

practical one needs to be a realist—to know where people’s interests lie and

how to design machines that produce results, as well as metrics that measure

those benefits in relation to the costs. Without such measures, waste will limit

or erase the benefits, and with them the benefits will keep flowing.

e. Don’t assume that a person who has been successful elsewhere will be successful in

the job you’re giving them. No matter how good you are at hiring, some of your

hires won’t work out. Know how the people you’re considering operate and

visualize how that will produce successful results. Knowing what they did is

valuable only insofar as it helps you figure out what they are like.

f. Make sure your people have character and are capable. The person who is

capable but doesn’t have good character is generally destructive, because he

or she has the cleverness to do you harm and will certainly erode the culture.

In my opinion, most organizations overvalue the abilities piece and

undervalue the character piece because of a shortsighted focus on getting the

job done. In doing so, they lose the power of the great relationships that will

take them through both good and bad times.

Don’t get me wrong, I’m not saying that you should compromise

capabilities for character. The person with good character and poor abilities

also creates problems. While likable, he or she won’t get the job done and is

painfully difficult to fire because doing so feels like shooting the loyal dog

you can’t afford to keep anymore—but he must go. Ultimately, what you

need in the people you work with are excellent character and excellent

capabilities, which is why it’s so hard to find great people.

8.5 Don’t hire people just to fit the first job they will

do; hire people you want to share your life with.

Turnover is costly and inefficient because of the time it takes for people to

get to know each other and the organization. Both the people you work with

and the company itself will evolve in ways you can’t anticipate. So hire the

kind of people you want to share a long-term mission with. You will always

have uses for great people.

a. Look for people who have lots of great questions. Smart people are the ones who

ask the most thoughtful questions, as opposed to thinking they have all the

answers. Great questions are a much better indicator of future success than

great answers.

b. Show candidates your warts. Show your job prospects the real picture,

especially the bad stuff. Also show them the principles in action, including

the most difficult aspects. That way you will stress-test their willingness to

endure the real challenges.

c. Play jazz with people with whom you are compatible but who will also challenge

you. You need people who share your tastes and style but who can also push

and challenge each other. The best teams, whether in music, in sports, or in

business, do all those things at the same time.

8.6 When considering compensation, provide both

stability and opportunity.

Pay people enough so that they’re not under financial stress, but not so much

that they become fat and happy. You want your people to be motivated to

perform so they can realize their dreams. You don’t want people to accept a

job for the security of making a lot more money—you want them to come for

the opportunity to earn it through hard and creative work.

a. Pay for the person, not the job. Look at what people in comparable jobs with

comparable experience and credentials make, add some small premium over

that, and build in bonuses or other incentives so they will be motivated to

knock the cover off the ball. Never pay based on the job title alone.

b. Have performance metrics tied at least loosely to compensation.While you will

never fully capture all the aspects that make for a great work relationship in

metrics, you should be able to establish many of them. Tying performance

metrics to compensation will help crystallize your understanding of your deal

with people, provide good ongoing feedback, and influence how the person

behaves on an ongoing basis.

c. Pay north of fair. By being generous or at least a little north of fair with

others I have enhanced both our work and our relationships and most people

have responded in kind. As a result, we have gained something even more

special than money in the form of mutual caring, respect, and commitment.

d. Focus more on making the pie bigger than on exactly how to slice it so that you or

anyone else gets the biggest piece. The best negotiations are the ones with

someone in which I say, “You should take more,” and they argue back, “No

you should take more!” People who operate this way with each other make

the relationship better and the pie bigger—and both benefit in the long run.

8.7 Remember that in great partnerships,

consideration and generosity are more

important than money.

Someone who doesn’t have much can be more generous giving a little than a

rich person giving a lot. Some people respond to the generosity while others

respond to the money. You want the first type with you, and you always want

to treat them generously.

When I had nothing, I was as generous as I could be with people who

appreciated my generosity more than the higher levels of compensation

others could afford to give them. For that reason, they stayed with me. I never

forgot that, and I made a point of making them rich when I had the

opportunity to do so. And they in turn were generous to me in their own way

when I needed their generosity most. We both got something much more

valuable than money—and we got the money too.

Remember that the only purpose of money is to get you what you want, so

think hard about what you value and put it above money. How much would

you sell a good relationship for? There’s not enough money in the world to

get you to part with a valued relationship.

a. Be generous and expect generosity from others. If you’re not generous with

others and others aren’t generous with you, you won’t have a quality

relationship.

8.8 Great people are hard to find so make sure you

think about how to keep them.

Make sure you’re following the suggestions made earlier, like building

meaningful relationships and constantly getting in sync. Most importantly,

you have to encourage people to speak up about how things are going for

them. Ensuring that their personal development is proceeding appropriately is

important too. Close advice from an active mentor should last at least one

year.

When you know

what someone is

like, you know

what you can

expect from them.

9 Constantly Train, Test,

Evaluate, and Sort People

Both your people and your design must evolve for your machine to improve.

When you get personal evolution right, the returns are exponential. As people

get better and better, they are more able to think independently, probe, and

help you refine your machine. The faster they evolve, the faster your

outcomes will improve.

Your part in an employee’s personal evolution begins with a frank

assessment of their strengths and weaknesses, followed by a plan for how

their weaknesses can be mitigated either through training or by switching to a

different job that taps into their strengths and preferences. At Bridgewater,

new employees are often taken aback by how frank and direct such

conversations can be, but it’s not personal or hierarchical—no one is exempt

from this kind of criticism. While this process is generally difficult for both

managers and their subordinates, in the long run it has made people happier

and Bridgewater more successful. Remember that most people are happiest

when they are improving and doing the things that suit them naturally and

help them advance. So learning about your people’s weaknesses is just as

valuable (for them and for you) as is learning their strengths.

Even as you help people develop, you must constantly assess whether they

are able to fulfill their responsibilities excellently. This is not easy to do

objectively since you will often have meaningful relationships with your

reports and may be reluctant to evaluate them accurately if their performance

isn’t at the bar. By the same token, you may be tempted to give an employee

who rubs you the wrong way a worse evaluation than he or she deserves. An

idea meritocracy requires objectivity. Many of the management tools we have

developed were built to do just that, providing us with an unbiased picture of

people and their performance independent of the biases of any one manager.

This data is essential in cases where a manager and a report are out of sync

on an assessment and others are called in to resolve the dispute.

A few years ago, one of our employees was serving in a trial role as a

department head. The prior department head had left the firm, and Greg, who

was then CEO, was assessing whether this employee, who had previously

been a deputy, had the right abilities to step into the role. The employee

thought he did; Greg and others thought he did not. But this decision was not

as simple as the CEO “making the call.” We want decisions to be more

evidence-based. As a result of our Dot Collector system of constant feedback,

we had literally hundreds of data points on the specific attributes required for

the job, including synthesis, knowing what he didn’t know, and managing at

the right level. So we put all this data onto the screen and stared hard at it

together. We then asked the employee to look at that body of evidence and

reflect on what he would do if he were in the position of deciding whether

he’d hire himself for the job. Once he was able to step back and look at the

objective evidence, he agreed to move on and try another role at Bridgewater

more suited to his strengths.

Helping people acquire skills is easy—it’s typically a matter of providing

them with appropriate training. Improvements in abilities are more difficult

but essential to expanding what a person can be responsible for over time.

And changing someone’s values is something you should never count on. In

every relationship, there comes a point when you must decide whether you

are meant for each other—that’s common in private life and at any

organization that holds high standards. At Bridgewater, we know that we

cannot compromise on the fundamentals of our culture, so if a person can’t

get to the bar in an acceptable time frame, he or she must leave.

Every leader must decide between 1) getting rid of liked but incapable

people to achieve their goals and 2) keeping the nice but incapable people

and not achieving their goals. Whether or not you can make these hard

decisions is the strongest determinant of your own success or failure. In a

culture like Bridgewater’s, you have no choice. You must choose excellence,

even though it might be difficult at the moment, because it’s best for

everyone.

9.1 Understand that you and the people you manage

will go through a process of personal evolution.

No one is exempt from this process. Having it go well depends on people’s

abilities to make frank assessments of strengths and weaknesses (most

importantly weaknesses). While it’s generally as difficult for managers to

give this feedback as it is for their subordinates to hear it, in the long run it

makes people happier and the organization more successful.

a. Recognize that personal evolution should be relatively rapid and a natural

consequence of discovering one’s strengths and weaknesses; as a result, career paths

are not planned at the outset. The evolutionary process is about discovering

people’s likes and dislikes as well as their strengths and weaknesses; it occurs

when people are put into jobs they are likely to succeed at, but in which they

have to stretch themselves. Each person’s career will evolve based on what

we all learn about what the person is like.

They should be given enough freedom to learn and think for themselves

while being coached so they are prevented from making unacceptable

mistakes. The feedback they receive should help them reflect on whether

their problems are the kind that can be resolved by additional learning or

stem from natural abilities that are unlikely to change. Typically it takes from

six to twelve months to get to know a new employee in a by-and-large sort of

way, and about eighteen months for them to internalize and adapt to the

culture. During this time there should be periodic mini-reviews and several

major ones. Following each of these assessments, new assignments should be

made that are tailored to their likes and dislikes and strengths and

weaknesses. This is an iterative process, in which the accumulated

experiences of training, testing, and adjusting direct the person to ever more

suitable roles and responsibilities. At Bridgewater, it is typically both a

challenging and rewarding process that benefits the individual by providing

better self-understanding and greater familiarity with various jobs. When it

results in a parting of ways, it’s usually because people find they cannot be

excellent and happy in any job at the firm.

b. Understand that training guides the process of personal evolution.Trainees must

be open-minded; the process requires them to suspend their egos while they

discover what they are doing well and what they are doing poorly and decide

what to do about it. The trainer must be open-minded as well, and it’s best if

at least two believable trainers work with each trainee in order to triangulate

their views about what the trainee is like. This training is an apprentice

relationship; it occurs as the trainer and trainee share experiences, much like

when a ski instructor skis alongside his student. The process promotes

growth, development, and transparency around where people stand, why they

stand where they stand, and what they can do about improving it. It hastens

not just their own personal evolution but the evolution of the organization.

c. Teach your people to fish rather than give them fish, even if that means letting them

make some mistakes. Sometimes you need to stand by and let someone make a

mistake (provided it’s not too serious) so they can learn. It’s a bad sign if you

are constantly telling people what they should do; micromanagement

typically reflects inability on the part of the person being managed. It’s also

not a good thing for you as a manager. Instead of micromanaging, you should

be training and testing. Give people your thoughts on how they might

approach their decisions, but don’t dictate to them. The most useful thing you

can do is to get in sync with them, exploring how they are doing things and

why.

d. Recognize that experience creates internalized learning that book learning can’t

replace. There are huge differences between memory-based book learning and

hands-on, internalized learning. A medical student who has learned to

perform an operation in a medical school class has not learned it in the same

way as a doctor who has already conducted several operations. People who

excel at book learning tend to call up from memory what they have learned in

order to follow stored instructions. People who have internalized their

learning use the thoughts flowing from their subconscious without thinking,

in the same way they walk down the street. Understanding these differences

is essential.

9.2 Provide constant feedback.

Most training comes from doing and getting in sync about performance.

Feedback should reflect what is succeeding and what is not in proportion to

the actual situation, rather than in an attempt to balance compliments and

criticisms. Remember that you are responsible for achieving your goals, and

you want your machine to function as intended. For it to do so, the employees

you supervise must meet expectations, and only you can help them

understand whether they are stacking up. As their strengths and weaknesses

become clearer, responsibilities can be more appropriately tailored to make

the machine work better and to facilitate personal evolution.

9.3 Evaluate accurately, not kindly.

Nobody ever said radical honesty was easy. Sometimes, especially with new

employees who have not yet gotten used to it, an honest assessment feels like

an attack. Rise to a higher level and keep your eye on the bigger picture and

counsel the person you are evaluating to do the same.

a. In the end, accuracy and kindness are the same thing. What might seem kind but

isn’t accurate is harmful to the person and often to others in the organization

as well.

b. Put your compliments and criticisms in perspective. It helps to clarify whether

the weakness or mistake under discussion is indicative of a trainee’s total

evaluation. One day I told one of our new research people what a good job I

thought he was doing and how strong his thinking was. It was a very positive

initial evaluation. A few days later I heard him chatting away at length about

stuff that wasn’t related to work, so I warned him about the cost to his and

our development if he regularly wasted time. Afterward I learned that he

thought he was on the brink of being fired. My comment about his need for

focus had nothing to do with my overall evaluation. Had I explained myself

better when we sat down that second time, he could have put my comment

into perspective.

c. Think about accuracy, not implications. It’s often the case that someone

receiving critical feedback gets preoccupied with the implications of that

feedback instead of whether it’s true. This is a mistake. As I’ll explain later,

conflating the “what is” with the “what to do about it” typically leads to bad

decision making. Help others through this by giving feedback in a way that

makes it clear that you’re just trying to understand what’s true. Figuring out

what to do about it is a separate discussion.

d. Make accurate assessments. People are your most important resource and

truth is the foundation of excellence, so make your personnel evaluations as

precise and accurate as possible. This takes time and considerable back-and-

forth. Your assessment of how Responsible Parties are performing should be

based not on whether they’re doing it your way but on whether they’re doing

it in a good way. Speak frankly, listen with an open mind, consider the views

of other believable and honest people, and try to get in sync about what’s

going on with the person and why. Remember not to be overconfident in your

assessments, as it’s possible you are wrong.

e. Learn from success as well as from failure. Radical truth doesn’t require you to

be negative all the time. Point out examples of jobs done well and the causes

of their success. This reinforces the actions that led to the results and creates

role models for those who are learning.

f. Know that most everyone thinks that what they did, and what they are doing, is

much more important than it really is. If you ask everybody in an organization

what percentage of the organization’s success they’re personally responsible

for, you’ll wind up with a total of about 300 percent.

That’s just the reality,

and it shows why you must be precise in attributing specific results to

specific people’s actions. Otherwise, you’ll never know who is responsible

for what—and even worse, you may make the mistake of believing people

who wrongly claim to be behind great accomplishments.

9.4 Recognize that tough love is both the hardest and

the most important type of love to give (because

it is so rarely welcomed).

The greatest gift you can give someone is the power to be successful. Giving

people the opportunity to struggle rather than giving them the things they are

struggling for will make them stronger.

Compliments are easy to give but they don’t help people stretch. Pointing

out someone’s mistakes and weaknesses (so they learn what they need to deal

with) is harder and less appreciated, but much more valuable in the long run.

Though new employees will come to appreciate what you are doing, it is

typically difficult for them to understand it at first; to be effective, you must

clearly and repeatedly explain the logic and the caring behind it.

a. Recognize that while most people prefer compliments, accurate criticism is more

valuable. You’ve heard the expression “no pain no gain.” Psychologists have

shown that the most powerful personal transformations come from

experiencing the pain from mistakes that a person never wants to have again

—known as “hitting bottom.” So don’t be hesitant to give people those

experiences or have them yourself.

While it is important to be clear to people about what they are doing well,

it is even more important to point out their weaknesses and have them reflect

on them.

Problems require more time than things that are going well. They must be

identified and understood and addressed, while things that are running

smoothly require less attention. Instead of celebrating how great we are, we

focus on where we need to improve, which is how we got to be so great.

9.5 Don’t hide your observations about people.

Explore them openly with the goal of figuring out how you and your people

are built so that the right people can be put in the right jobs.

a. Build your synthesis from the specifics up. By synthesizing, I mean converting

a lot of data into an accurate picture. Too many people make assessments of

people without connecting them to specific data. When you have all the

specifics that we have at Bridgewater—the dots, meeting tapes, etc.—you can

and must work from the specifics up and see the patterns in the data. Even

without such tools, other data such as metrics, testing, and the input of others

can help you form a more complete picture of what the person is like, as well

as examine what they did.

b. Squeeze the dots. Every observation of a person potentially tells you

something valuable about how they operate. As I explained earlier, I call

these observations “dots.” A dot is a piece of data that’s paired with your

inference about what it means—a judgment about what someone might have

decided, said, or thought. Most of the time we make these inferences and

judgments implicitly and keep them to ourselves, but I believe that if they are

collected systematically and put into perspective over time, they can be

extremely valuable when it’s time to step back and synthesize the picture of a

person.

c. Don’t oversqueeze a dot. Remember: A dot is just a dot; what matters is how

they add up. Think of each individual dot as an at-bat in baseball. Even great

hitters are going to strike out many times, and it would be foolish to evaluate

them based on one trip to the plate. That’s why stats like on-base percentage

and batting average exist.

In other words, any one event has many different possible explanations,

whereas a pattern of behavior can tell you a lot about root causes. The

number of observations needed to detect a pattern largely depends on how

well you get in sync after each observation. A quality discussion of how and

why a person behaved a certain way should help you understand the larger

picture.

d. Use evaluation tools such as performance surveys, metrics, and formal reviews to

document all aspects of a person’s performance.It’s hard to have an objective,

open-minded, emotion-free conversation about performance if there is no

data to discuss. It’s also hard to track progress. This is part of the reason I

created the Dot Collector. I also recommend thinking about other ways that

people’s responsibilities can be put in metrics. One example: You can have

people note whether they did or didn’t do things on checklists, which you can

then use to calculate what percentage of tasks they complete. Metrics tell us

whether things are going according to plan—they are an objective means of

assessment and they improve people’s productivity.

9.6 Make the process of learning what someone is

like open, evolutionary, and iterative.

Articulate your assessment of a person’s values, abilities, and skills up front

and share it; listen to their and others’ responses to your description; organize

a plan for training and testing; and reassess your conclusions based on the

performance you observe. Do this on an ongoing basis. After several months

of discussions and real-world tests, you and your report should both have a

pretty good idea of what he or she is like. Over time this exercise will

crystallize suitable roles and appropriate training or it will reveal that it’s time

for the person to find a more appropriate job somewhere else.

a. Make your metrics clear and impartial. To help you build your perpetual

motion machine, have a clear set of rules and a clear set of metrics to track

how people are performing against those rules—and predetermined

consequences that are determined formulaically based on the output of those

metrics.

The more clear-cut the rules are, the less arguing there will be about

whether someone did something wrong. For example, we have rules about

how employees can manage their own investments in a way that doesn’t

conflict with how we manage money for clients. Because these rules are

clear-cut, there’s no room for argument when a breach occurs.

Having metrics that allow everyone to see everyone else’s track record

will make evaluation more objective and fair. People will do the things that

will get them higher grades and will argue less about them. Of course, since

most people have a number of things to do that are of different importance,

different metrics have to be used and weighted appropriately. The more data

you collect, the more immediate and precise the feedback will be. That is one

of the reasons I created the Dot Collector tool to work as it does (providing

lots of immediate feedback); people often use the feedback that they get

during a meeting to course-correct in the meeting in real time.

Once you have your metrics, you can tie them to an algorithm that spits

out consequences. They can be as simple as saying that for every time you do

X you will earn Y amount of money (or bonus points), or it can be more

complex (for example, tying the weighted mix of metrics grades to various

algorithms that provide the estimated compensation or bonus points).

While this process will never be exact, it will still be good in even its

crudest form, and over time it will evolve to be terrific. Even when flawed,

the formulaic output can be used with discretion to provide a more precise

evaluation and compensation; over time it will evolve into a wonderful

machine that will do much of your managing better than you could do it on

your own.

b. Encourage people to be objectively reflective about their performance. Being able

to see yourself from a higher level is essential for personal evolution and

achieving your goals. So you and the people who report to you should be

looking at the evidence of their performance together; for this to go well, you

need lots and lots of evidence and an objective point of view. If required, use

agreed-upon others to triangulate the picture the evidence presents.

c. Look at the whole picture. In reviewing someone, the goal is to see the

patterns and to understand the whole picture. No one can be successful in

every way (if they are extremely meticulous, for example, they might not be

able to be fast, and vice versa). Assessments made in reviews must be

concrete; they’re not about what people should be like but what they are like.

d. For performance reviews, start from specific cases, look for patterns, and get in

sync with the person being reviewed by looking at the evidence together. While

feedback should be constant, reviews are typically periodic; their purpose is

to bring together the accumulated evidence of what a person is like as it

pertains to their job performance. If the constant feedback is done well, it will

become like a constant review as the bits and pieces will add up to the whole.

A review should contain few surprises, because you should continuously be

striving to make sense of how the person is doing their job. If you think their

job is being done badly, you should have been probing to identify and

address the root causes of their underperformance on a case-by-case basis.

It’s difficult for people to identify their own weaknesses; they need the

appropriate probing (not nit-picking) of specific cases by others to get at the

truth of what they are like and how they are fitting into their jobs.

In some cases it won’t take long to see what a person is like; in other cases

it’s a lot harder. But over time and with a large enough sample of cases, their

track records (the level and the steepness up or down in the trajectories that

they are responsible for, rather than the occasional wiggles) should paint a

clear picture of what you can expect from them. If there are performance

issues, it is either because of design problems (perhaps the person has too

many responsibilities) or fit/abilities problems. If the problems are due to the

person’s inabilities, these inabilities are either because of the person’s innate

weaknesses in doing that job (e.g., someone who’s five foot two probably

shouldn’t be a center on the basketball team) or because of inadequate

training. A good review, and getting in sync throughout the year, should get

at these things. Make sure to make your assessment relative to the absolute

bar, not just the progress over time. What matters most is not just outcomes

but how responsibilities were handled. The goal of a review is to be clear

about what the person can and can’t be trusted to do based on what they are

like. From there, you can determine what to do about it.

e. Remember that when it comes to assessing people, the two biggest mistakes you can

make are being overconfident in your assessment and failing to get in sync on it. If

you believe that something is true about someone, it’s your responsibility to

make sure that it is true and that the person you’re assessing agrees. Of

course, in some cases it may be impossible to get in sync (if you believe that

someone was dishonest and they insist that they weren’t, for example), but in

a culture of truth and transparency it is an obligation to share your view and

let others express theirs.

f. Get in sync on assessments in a nonhierarchical way. In most organizations,

evaluations run in only one direction, with the manager assessing the

managee. The managee typically disagrees with the assessment, especially if

it is worse than his or her self-assessment, because most people believe

themselves to be better than they really are. Managees also have opinions

about managers that they wouldn’t dare bring up in most companies, so

misunderstandings and resentments fester. This perverse behavior

undermines the effectiveness of the environment and the relationships

between people. It can be avoided by getting in sync in a high-quality way.

Your reports have to believe that you’re not their enemy—that your sole

goal is to move toward the truth; that you are trying to help them and so will

not enable their self-deception, perpetuate a lie, or let them off the hook. This

has to be done in an honest and transparent way, because if someone believes

they are being pigeonholed unfairly the process won’t work. As equal

partners, it is up to both of you to get to the truth. When each party is an

equal participant, no one can feel cornered.

g. Learn about your people and have them learn about you through frank

conversations about mistakes and their root causes. You need to be clear in

conveying your assessments to your reports and open-minded in listening to

their replies so you can work on setting their training and career paths

together. Recognizing and communicating people’s weaknesses is one of the

most difficult things managers have to do. It’s important for the party

receiving feedback to be sympathetic to the person trying to give it, because

it’s not easy—it takes character on the part of both participants to get to the

truth.

h. Understand that making sure people are doing a good job doesn’t require watching

everything that everybody is doing at all times. You just have to know what they

are like and get a sampling. Regular sampling of a statistically reliable

number of cases will show you what a person is like and what you can expect

from them. Select which of their actions are critical enough to need

preapproval and which can be examined later. But be sure to do the audit,

because people will tend to give themselves too much slack or could cheat

when they see that they’re not being checked.

i. Recognize that change is difficult. Anything that requires change can be

difficult. Yet in order to learn and grow and make progress, you must change.

When facing a change, ask yourself: Am I being open-minded? Or am I being

resistant? Confront your difficulties head-on, force yourself to explore where

they come from, and you’ll find that you’ll learn a lot.

j. Help people through the pain that comes with exploring their weaknesses.

Emotions tend to heat up during most disagreements, especially when the

subject is someone’s weaknesses. Speak in a calm, slow, and analytical

manner to facilitate communication. Put things in perspective by reminding

them that their pain is the pain that comes with learning and personal

evolution—and that knowing the truth will put them on the path to a much

better place. Consider asking them to go away and reflect when they are

calm, and have a follow-up conversation a few days later.

Ultimately, to help people succeed you have to do two things: First let

them see their failures so clearly that they are motivated to change them, and

then show them how to either change what they are doing or rely on others

who are strong where they are weak. While doing the first without the second

can be demoralizing to the people you are trying to help, doing them both

should be invigorating, especially when they start experiencing the benefits.

9.7 Knowing how people operate and being able to

judge whether that way of operating will lead to

good results is more important than knowing

what they did.

Knowing what people are like is the best indicator of how well they are likely

to handle their responsibilities in the future. At Bridgewater, we call this

“paying more attention to the swing than the shot.” Since good and bad

outcomes can arise from circumstances that might not have had anything to

do with how the individual handled the situation, it is preferable to assess

people based on both their reasoning and their outcomes. I probe their

thinking in a very frank way so as not to let them off the hook. Doing this has

taught me a lot about how to assess others’ logic, and how to have better

logic myself. When both the outcomes and the thinking behind them are bad,

and when this happens a number of times, I know I don’t want them to do

that type of thinking anymore.

For example, if you’re a poker player and you play a lot of poker, you will

win some hands and lose others and on any given night you might walk away

with less money than a lesser player who’s gotten lucky. It would be a

mistake to judge the quality of a player based on just one outcome. Instead,

look at how well someone does what they do and the outcomes they produce

over time.

a. If someone is doing their job poorly, consider whether it is due to inadequate

learning or inadequate ability. Think of people’s performance as being made up

of two things: learning and ability, as shown on page 437. A weakness that is

due to a lack of experience or training can be fixed, while a weakness that is

due to a lack of ability can’t be. Failing to distinguish between these causes is

a common mistake among managers, because managers are often reluctant to

appear unkind or judgmental. Also, they know that people assessed this way

tend to push back. This is another one of those situations in which you must

force yourself to be practical and realistic.

b. Training and testing a poor performer to see if he or she can acquire the required

skills without simultaneously trying to assess their abilities is a common mistake.

Skills are readily testable, so they should be easy to determine. Abilities,

especially right-brained abilities, are more difficult to assess. When thinking

about why someone is a poor performer, openly consider whether it is a

problem with their abilities.

9.8 Recognize that when you are really in sync with

someone about their weaknesses, the weaknesses

are probably true.

When you reach an agreement, it’s a good sign you’ve arrived at truth, which

is why getting to that point is such a great achievement. This is one of the

main reasons that the person being evaluated must be an equal participant in

the process. When you do agree, make a formal record of it. This information

will be a critical building block for future success.

a. When judging people, remember that you don’t have to get to the point of “beyond

a shadow of a doubt.” Perfect understanding isn’t possible; trying to get to it

wastes time and stalls progress. Instead, work toward developing a mutually

agreed-upon, by-and-large understanding of what someone is like that has a

high level of confidence behind it. When necessary, take the time to enrich

this understanding.

b. It should take you no more than a year to learn what a person is like and whether

they are a click for their job. You should be able to roughly assess someone’s

abilities after six to twelve months of close contact, numerous tests, and

getting in sync. A more confident assessment will probably take about

eighteen months. This timeline will of course depend on the job, the person,

the amount of contact with them, and how well you get in sync.

c. Continue assessing people throughout their tenure. As you get to know your

people better, you will be better able to train and direct them. Most

importantly, you will be able to assess their core values and abilities more

accurately and make sure they complement yours. Don’t rest with your initial

evaluation, however. Always ask yourself if you would have hired them for

that job knowing what you know now. If not, get them out of the job.

d. Evaluate employees with the same rigor as you evaluate job candidates. I find it

puzzling that interviewers freely and confidently criticize job candidates

without knowing them well but won’t criticize employees for similar

weaknesses even though they have more evidence. That is because they view

criticism as harmful and feel more protective of a fellow employee than they

do of an outsider. If you believe that truth is best for everyone, then you

should see why this is a mistake, and why frank and ongoing evaluations are

so important.

9.9 Train, guardrail, or remove people; don’t

rehabilitate them.

Training is part of a plan to develop people’s skills and help them evolve.

Rehabilitation is an attempt to create significant changes in people’s values

and/or abilities. Since values and abilities are difficult to change,

rehabilitation is typically impractical. Since people with inappropriate values

and inadequate abilities can have a devastating impact on the organization,

they should be fired. If rehabilitation is attempted, it is generally best directed

by professionals over extended periods of time.

Remember that if you are expecting people to be much better in the near

future than they have been in the past, you are probably making a serious

mistake. People who repeatedly operate in a certain way will probably

continue to operate that way because that behavior reflects what they’re like.

Since people generally change slowly, you should expect slow improvement

(at best). Instead, you need to change the people or change the design. Since

changing the design to accommodate people’s weaknesses is generally a bad

idea, it is better to sort the people. Sometimes good people “lose their boxes”

(they get fired from their role) because they can’t evolve into Responsible

Parties soon enough. Some of them might be good in another position, in

which case they should be reassigned within the company; some of them will

not and should leave.

a. Don’t collect people. It is much worse to keep someone in a job unsuitable for

them than it is to fire or reassign them. Consider the enormous costs of not

firing someone unsuited for a job: the costs of bad performance; the time and

effort wasted trying to train them; and the greater pain of firing someone

who’s been around awhile (say, five years or more) compared with letting

someone go after just a year. Keeping people in jobs they are not suited for is

terrible for them because it allows them to live in a false reality while holding

back their personal evolution, and it is terrible for the community because it

compromises the meritocracy and everyone pays the price. Don’t let yourself

be held hostage to anyone; there is always someone else. Never compromise

your standards or let yourself be squeezed.

b. Be willing to “shoot the people you love.” It is very difficult to fire people you

care about. Cutting someone that you have a meaningful relationship with but

who isn’t an A player in their job is difficult because ending good

relationships is hard, but it is necessary for the long-term excellence of the

company. You may have a need for the work they’re doing (even if it’s not

excellent) and find it hard to make a change. But they will pollute the

environment and fail you when you really need them.

Doing this is one of those difficult, necessary things. The best way to do it

is to “love the people you shoot”—do it with consideration and in a way that

helps them.

c. When someone is “without a box,” consider whether there is an open box that

would be a better fit or whether you need to get them out of the company. Recognize

that if they failed in that job, it is because of some qualities they have. You

will need to understand what those qualities are and make sure they don’t

apply to any new role. Also, if you learn that they don’t have the potential to

move up, don’t let them occupy the seat of someone who can.

Remember that you’re trying to select people with whom you want to

share your life. Everyone evolves over time. Because managers develop a

better idea of a new hire’s strengths and weaknesses and their fit within the

culture than what emerges from the interview process, they are well

positioned to assess them for another role if the one they were hired for

doesn’t work out.

Whenever someone fails at a job, it’s critical to understand why they

failed and why those reasons won’t pose the same problems in a new job.

d. Be cautious about allowing people to step back to another role after failing. Note I

said “be cautious.” I didn’t say never, because it depends on the

circumstances. On the one hand, you want people to stretch themselves and

experiment with new jobs. You don’t want to get rid of a great person just

because he or she tried something new and failed. But on the other hand, if

you look at most people in this situation, by and large you’ll regret allowing

them to step back.

There are three reasons for this: 1) You’re giving up a seat for someone

else who might be able to advance, and people who can advance are better to

have than people who can’t; 2) The person stepping back could continue to

want to do what they aren’t capable of doing, so there’s a real risk of them

job slipping into work they’re not a fit for; 3) The person may experience a

sense of confinement and resentment being back in a job that they probably

can’t advance beyond. Keeping them is generally viewed as the preferable

short-run decision but in the long run it’s probably the wrong thing to do.

This is a hard decision. You need to understand deeply what the person in

this situation is like and weigh the costs carefully before deciding.

9.10 Remember that the goal of a transfer is the best,

highest use of the person in a way that benefits

the community as a whole.

Both affected managers should be in sync that the new role is the best,

highest use or escalate up the chain to make a determination. The manager

wanting to recruit the person is responsible for not causing a disruption. An

informal conversation to see if someone is interested is fine, but there should

be no active recruiting prior to getting in sync with the existing manager. The

timing of the move should be decided by the existing manager in consultation

with relevant parties.

a. Have people “complete their swings” before moving on to new roles. There should

always be follow-through, not interruption, unless a pressing reason exists

(when, say, a person would be a great click for another job that needs to be

filled immediately). In a company where things are evolving quickly and

people are expected to speak openly, it is natural that there will be a steady

stream of opportunities for employees to move into new roles. But if too

many people jump from one job to another without fulfilling their

responsibilities, the resulting discontinuity, disorder, and instability will be

bad for managers, bad for the culture, and bad for the people moving,

because they won’t be adequately tested in their ability to move things to

completion. As a guideline, a year in a job is sufficient before having

conversations about a new role, although this isn’t black and white—the

range could easily vary depending on the circumstances.

9.11 Don’t lower the bar.

You reach a point in all relationships when you must decide whether you are

meant for each other—that’s common in private life and at any organization

that holds very high standards. At Bridgewater, we know that we cannot

compromise on the fundamentals of our culture, so if a person cannot operate

within our requirements of excellence through radical truth and transparency

in an acceptable time frame, he or she must leave.

Tough love is both

the hardest and the

most important

type of love to

give.

TO BUILD AND EVOLVE

YOUR MACHINE . . .

Most people get caught up in the blizzard of things coming at them. In

contrast, successful people get above the blizzard so they can see the causes

and effects at play. This higher-level perspective allows them to see

themselves and others objectively as a machine, to understand who can and

cannot do what well, and how everyone can fit together in a way that will

produce the best outcomes.

Now that you’ve learned the best ways to approach your machine’s two

key components—its culture and its people—I’d like to turn to principles for

managing and improving your machine.

In the next chapter, I will go over my high-level principles for applying

higher-level thinking to conceptualize your organization as a machine. This

isn’t just a thought experiment; thinking in a machinelike way also has

important practical ramifications for how you manage your team and how

you design roles, responsibilities, and workflows.

In Chapter Ten, Manage as Someone Operating a Machine to Achieve a

Goal, I apply this approach to organizational design at its highest level.

Once you understand how to build and run your machine, your next

objective is to figure out how to improve it. We do this through the 5-Step

Process I described as 1) identifying our goals, 2) encountering our problems;

3) diagnosing those problems to get at their root causes; 4) designing changes

to get around the problems; and 5) doing what is needed. Think of any

organization you know and you will see that they go through this

evolutionary process with varying degrees of success. The world is littered

with once-great organizations that deteriorated because the initial waves of

excellence faded and the leadership failed to adequately adapt by changing

the people and the designs. There are also a few organizations that keep

reinventing themselves to go on to new heights of greatness.

The subsequent chapters of this section explain how the 5-Step Process

works within an organization, and what you need to do to make sure you get

the most out of it. To be effective, you must look down upon your machines

as would an organizational engineer, comparing the outputs with the goals,

and constantly modifying the people and the designs to make the outputs

better. Most importantly, you must orchestrate your people. How well you do

this will determine your success.

Finally, you’ll read two chapters on making sure the idea meritocracy runs

as designed, both at the day-to-day and the strategic level. Chapter Fifteen,

Use Tools and Protocols to Shape How Work Is Done, describes the

importance of systemization and tools to ensure the idea meritocracy

functions as intended. And in Chapter Sixteen, And for Heaven’s Sake, Don’t

Overlook Governance! I explain that while, at first, I underestimated the

importance of governance to ensuring that an organization operates

effectively over time, as I’ve transitioned myself out of running Bridgewater

day to day, I’ve learned a number of important principles for how governance

should function in an idea meritocracy.

39 We did this at Bridgewater and the figure came out to 301 percent.

10 Manage as Someone Operating

a Machine to Achieve a Goal

No matter what work you do, at a high level you are simply setting goals and

building machines to help you achieve them. I built the machine that is

Bridgewater by constantly comparing its actual outcomes to my mental map

of the outcomes that it should be producing, and finding ways to improve it.

I won’t say anything specific about how you should set your own

organization’s goals other than that the high-level principles about goal

setting I covered in Life Principles apply equally to individuals and

organizations. I will, however, point out that in running your organization,

you and the people you work with must be clear on how your lower-level

goals—whether they’re to produce things cost-effectively, achieve high

customer satisfaction, help a certain number of people in need, whatever—

grow out of your higher-level goals and values.

No matter how good you are at design, your machine will have problems.

You or some other capable mechanic needs to identify those problems and

look under the hood of the machine to diagnose their root causes. You or

whoever is diagnosing those problems has to understand what the parts of the

machine—the designs and the people—are like and how they work together

to produce the outcomes. The people are the most important part, since most

everything, including the designs themselves, comes from people. Unless you

have a clear understanding of your machine from a higher level—and can

visualize all its parts and how they work together—you will inevitably fail at

this diagnosis and fall short of your potential.

At Bridgewater, the high-level goal of all of our machines is to create

excellent outcomes for our clients—in the returns on their investments, of

course, but also in the quality of our relationship and our thought partnership

in understanding global economies and markets more broadly. Before we had

anything else at Bridgewater, we had this commitment to excellence.

Maintaining these extremely high standards has always been a challenge,

especially as the pace of our growth and change accelerated. In the next

several chapters, I will walk you through a case in which our client service

outcomes began to slip and show how we used the 5-Step Process to improve

our machine.

But first, I want to share some high-level principles for building and

evolving the machine that is any organization.

10.1 Look down on your machine and yourself within

it from the higher level.

Higher-level thinking isn’t something that’s done by higher-level beings. It’s

simply seeing things from the top down. Think of it as looking at a photo of

yourself and the world around you from outer space. From that vantage, you

can see the relationships between the continents, countries, and seas. Then

you can get more granular, by zooming into a closer-up view of your country,

your city, your neighborhood, and finally your immediate environment.

Having that macro perspective gives you much more insight than you’d get if

you simply looked around your house through your own eyes.

a. Constantly compare your outcomes to your goals. You must always be

simultaneously trying to accomplish the goal and evaluating the machine (the

people and the design), as all outcomes are reflections of how the machine is

running. Whenever you identify a problem with your machine, you need to

diagnose whether it is the result of a flaw in its design or in the way your

people are handling their responsibilities.

Sample size is important. Any problem can be a one-off imperfection or a

symptom of root causes that will show up as problems repeatedly. If you look

at enough problems, which one it is will become clear.

b. Understand that a great manager is essentially an organizational engineer. Great

managers are not philosophers, entertainers, doers, or artists. They are

engineers. They see their organizations as machines and work assiduously to

maintain and improve them. They create process-flow diagrams to show how

the machine works and to evaluate its design. They build metrics to light up

how well each of the individual parts of the machine (most importantly, the

people) and the machine as a whole are working. And they tinker constantly

with its designs and its people to make both better.

They don’t do this randomly. They do it systematically, always keeping

the cause-and-effect relationships in mind. And while they care deeply about

the people involved, they cannot allow their feelings for them or their desire

to spare them discomfort to stand in the way of the machine’s constant

improvement. To do otherwise wouldn’t be good for either the individuals on

the team or the team that the individuals are a part of.

Of course, the higher up you are in an organization, the more important

vision and creativity become, but you still must have the skills required to

manage/orchestrate well. Some young entrepreneurs start with the vision and

creativity and then develop their management skills as they scale their

companies; others start with management skills and develop vision as they

climb the ladder. But like great musicians, all great managers have both

creativity and technical skills. And no manager at any level can expect to

succeed without the skill set of an organizational engineer.

c. Build great metrics. Metrics show how the machine is working by providing

numbers and setting off alert lights in a dashboard. Metrics are an objective

means of assessment and they tend to have a favorable impact on

productivity. If your metrics are good enough, you can gain such a complete

and accurate view of what your people are doing and how well they are doing

it that you can almost manage via the metrics alone.

In constructing your metrics, imagine the most important questions you

need answered in order to know how things are going and imagine what

numbers will give you the answers to them. Don’t look at the numbers that

you have and try to adapt them to your purposes, because you won’t get what

you need. Instead start with the most important questions and imagine the

metrics that will answer them.

Remember that any single metric can mislead; you need enough evidence

to establish patterns. And of course the information that goes into the metrics

must be assessed for accuracy. A reluctance to be critical can be detected by

looking at the average grade each grader gives; those giving higher average

grades might be easy graders and vice versa. Similarly helpful are “forced

rankings,” in which people must rank co-worker performance from best to

worst. Forced rankings are essentially the same thing as “grading on a curve.”

Metrics that allow for independent grading across departments and groups are

especially valuable.

d. Beware of paying too much attention to what is coming at you and not enough

attention to your machine. If you keep your focus on each individual task, you

will inevitably get bogged down. If instead you pay attention to building and

managing your machines, you will be rewarded many times over.

e. Don’t get distracted by shiny objects. No matter how complete any project or

plan, there will always be things that come out of nowhere and look like the

most important or urgent or attractive thing to focus on. These shiny objects

may be traps that will distract you from thinking in a machinelike way, so be

on your guard for them and don’t let yourself be seduced.

10.2 Remember that for every case you deal with,

your approach should have two purposes . . .

. . . 1) to move you closer to your goal, and 2) to train and test your machine (i.e., your

people and your design). The second purpose is more important than the first

because it is how you build a solid organization that works well in all cases.

Most people focus more on the first purpose, which is a big mistake.

a. Everything is a case study. Think about what type of case it is and what

principles apply to that type of case. By doing this and helping others to do

this you’ll get better at handling situations as they repeat over and over again

through time.

b. When a problem occurs, conduct the discussion at two levels: 1) the machine level

(why that outcome was produced) and 2) the case-at-hand level (what to do about it).

Don’t make the mistake of just having the case-at-hand discussion, because

then you are micromanaging (i.e., you are doing your managee’s thinking and

your managee will mistakenly think that’s okay). When having the machine-

level discussion, think clearly how things should have gone and explore why

they didn’t go that way. If you are in a rush to determine what to do and you

have to tell the person who works for you what to do, make sure to explain

what you are doing and why.

c. When making rules, explain the principles behind them. You don’t want the

people you work with to merely pay lip service to your community’s rules;

they should have a high sense of ethics that makes them want to abide by

them and hold others accountable for abiding by them, while also working to

perfect them. The way to achieve this is via principles that are sound and that

have been tested through open discussion.

d. Your policies should be natural extensions of your principles. Principles are

hierarchical—some are overarching and some are less important—but they

all should inform the policies that guide your individual decisions. It pays to

think those policies through to ensure that they are consistent with each other

and the principles they are derived from.

When faced with a case that doesn’t have a clear policy to follow (for

example, what to do about an employee whose job is to travel but who faces

potential health risks because of his travel), one can’t just snatch an answer

out of the blue without regard for higher-level principles. Policymakers must

make policy in the same way that the judicial system creates case law—

iteratively and incrementally, by dealing with specific cases and interpreting

the law as it applies to them.

That is how I have tried to operate. When a case arises, I lay out the

principles behind how I am handling it and get in sync with others to see if

we agree on those principles or must modify them to make them better. By

and large, that’s how all Bridgewater’s principles and policies were

developed.

e. While good principles and policies almost always provide good guidance, remember

that there are exceptions to every rule. While everyone has the right to make

sense of things—and is in fact obliged to challenge principles and policies if

they conflict with what they believe is the best approach—that’s not the same

thing as having the right to change them. Changes in policies must be

approved by those who made them (or someone else who has been made

responsible for evolving them).

When someone wishes to make an exception to an important policy at

Bridgewater, they must write up a proposed alternative policy and escalate

their request to the Management Committee.

Exceptions should be extremely rare because policies that have frequent

exceptions are ineffective. The Management Committee will formally

consider it and either reject it, amend it, or adopt it.

10.3 Understand the differences between managing,

micromanaging, and not managing.

Great managers orchestrate rather than do. Like the conductor of an

orchestra, they do not play an instrument, but direct their people so that they

play beautifully together. Micromanaging, in contrast, is telling the people

who work for you exactly what tasks to do or doing their tasks for them. Not

managing is having them do their jobs without your oversight and

involvement. To be successful, you need to understand these differences and

manage at the right level.

a. Managers must make sure that what they are responsible for works well. They can

do this by 1) managing others well (as explained above), 2) job slipping

down to do work they’re not responsible for because others can’t do their

jobs well, or 3) escalating what they can’t manage well. The first choice is

optimal; the second signals that a change is needed in the people and the

design; the third choice is harder still but mandatory.

b. Managing the people who report to you should feel like skiing together. Like a ski

instructor, you need to have close contact with your people on the slopes so

that you can assess their strengths and weaknesses as they are doing their

jobs. There should be a good back-and-forth as they learn by trial and error.

With time you will be able to decide what they can and can’t handle on their

own.

c. An excellent skier is probably going to be a better ski coach than a novice skier.

Believability applies to management too. The better your track record, the

more value you can add as a coach.

d. You should be able to delegate the details. If you keep getting bogged down in

details, you either have a problem with managing or training, or you have the

wrong people doing the job. The real sign of a master manager is that he

doesn’t have to do practically anything. Managers should view the need to

get involved in the nitty-gritty as a bad sign.

At the same time, there’s danger in thinking you’re delegating details

when you’re actually being too distant from what’s important and essentially

are not managing. Great managers know the difference. They strive to hire,

train, and oversee in a way in which others can superbly handle as much as

possible on their own.

10.4 Know what your people are like and what

makes them tick, because your people are your

most important resource.

Develop a full profile of each person’s values, abilities, and skills. These

qualities are the real drivers of behavior, so knowing them in detail will tell

you which jobs a person can and cannot do well, which ones they should

avoid, and how the person should be trained. These profiles should change as

the people change.

If you don’t know your people well, you don’t know what you can expect

from them. You’re flying blind and you have no one to blame but yourself if

you don’t get the outcomes you’re expecting.

a. Regularly take the temperature of each person who is important to you and to the

organization. Probe your key people and urge them to bring up anything that

might be bothering them. These problems might be ones you are unaware of,

or they may be misunderstood by the person raising them. Whatever the case,

it is essential that they be brought out into the open.

b. Learn how much confidence to have in your people—don’t assume it. No manager

should delegate responsibilities to people they don’t know well. It takes time

to learn about people and how much confidence you can vest in them.

Sometimes new people are offended when their managers don’t have

confidence in how they are carrying out their responsibilities. They think it’s

a criticism of their abilities when it’s simply a matter of the manager being

realistic about the fact that he or she hasn’t had enough time or direct

experience with them to form a point of view.

c. Vary your involvement based on your confidence. Management largely consists

of scanning and probing everything you are responsible for to identify

suspicious signs. Based on what you see, you should vary your degree of

digging, doing more for people and areas that look suspicious, and less where

what you see instills confidence. At Bridgewater a host of tools (Issue Logs,

metrics, daily updates, checklists) produce objective performance-related

data. Managers should review and spot-check them regularly.

10.5 Clearly assign responsibilities.

Eliminate any confusion about expectations and ensure that people view their

failures to complete their tasks and achieve their goals as personal failures.

The most important person on a team is the one who is given the overall

responsibility for accomplishing the mission. This person must have both the

vision to see what should be done and the discipline to make sure it’s

accomplished.

a. Remember who has what responsibilities. While that might sound obvious,

people often fail to stick to their own responsibilities. Even senior people in

organizations sometimes act like young kids just learning to play soccer,

running after the ball in an effort to help but forgetting what position they are

supposed to play. This can undermine rather than improve performance. So

make sure that people remember how the team is supposed to work and play

their positions well.

b. Watch out for “job slip.” Job slip is when a job changes without being

explicitly thought through and agreed to, generally because of changing

circumstances or a temporary necessity. Job slip often leads to the wrong

people handling the wrong responsibilities and confusion over who is

supposed to do what.

10.6 Probe deep and hard to learn what you can

expect from your machine.

Constantly probe the people who report to you while making sure they

understand that it’s good for them and everyone else to surface their

problems and mistakes. Doing so is required to make sure you’re getting

what you want, even from people who are doing their jobs well (though they

can be given a bit more leeway).

Probing shouldn’t just come from the top down. The people who work for

you should constantly challenge you, so that you can become as good as you

can be. In doing so, they will understand that they are just as responsible for

finding solutions as you are. It’s much easier for people to remain spectators

than to become players. Forcing them onto the field strengthens the whole

team.

a. Get a threshold level of understanding. When managing an area, you need to

gain a rich enough understanding of the people, processes, and problems

around you to make well-informed decisions. Without that understanding,

you will believe the stories and excuses you are told.

b. Avoid staying too distant. You need to know your people extremely well,

provide and receive regular feedback, and have quality discussions. And

while you don’t want to get distracted by gossip, you have to be able to get a

quick download from the appropriate people. Your job design needs to build

in the time to do these things. If it doesn’t, you run the risk of not managing.

The tools I have developed give me windows into what people are doing and

what they are like, and I follow up on problems.

c. Use daily updates as a tool for staying on top of what your people are doing and

thinking. I ask each person who reports to me to take about ten to fifteen

minutes to write a brief description of what they did that day, the issues

pertaining to them, and their reflections. By reading these updates and

triangulating them (i.e., seeing other people’s takes on what they are doing

together), I can gauge how they are working together, what their moods are,

and which threads I should pull on.

d. Probe so you know whether problems are likely to occur before they actually do. If

problems take you by surprise, it is probably because you are either too far

removed from your people and processes or you haven’t adequately

visualized how the people and processes might lead to various outcomes.

When a crisis is brewing, contact should be close enough that there will be no

surprises.

e. Probe to the level below the people who report to you. You can’t understand how

the person who reports to you manages others unless you know their direct

reports and can observe how they behave.

f. Have the people who report to the people who report to you feel free to escalate

their problems to you. This is a great and useful form of upward accountability.

g. Don’t assume that people’s answers are correct. People’s answers could be

erroneous theories or spin, so you need to occasionally double-check them,

especially when they sound questionable. Some managers are reluctant to do

this, feeling it is the equivalent of saying they don’t trust their people. These

managers need to understand that this process is how trust is earned or lost.

Your people will learn to be much more accurate in what they tell you if they

understand this—and you will learn who you can rely on.

h. Train your ear. Over time, you’ll hear the same verbal cues indicating that

someone is thinking about something badly or failing to apply principles

appropriately. For example, listen for the anonymous “we” as a cue that

someone is likely depersonalizing a mistake.

i. Make your probing transparent rather than private. This helps assure the

quality of the probing (because others can make their own assessments), and

it will reinforce the culture of truth and transparency.

j. Welcome probing. It’s important to welcome probing of yourself because no

one can see themselves objectively. When you are being probed, it’s essential

to stay calm. Your emotional “lower-level you” will probably react to

probing with something like, “You’re a jerk because you’re against me and

making me feel bad,” whereas your thoughtful “higher-level you” should be

thinking, “It’s wonderful that we can be completely honest like this and have

such a thoughtful exchange to help assure that I’m doing things well.” Listen

to your higher-level you and don’t lose sight of how difficult it can be for the

person doing the probing. Besides helping to make the organization and your

relationship with the person who is probing you go well, working yourself

through this difficult probing will build your character and your equanimity.

k. Remember that people who see things and think one way often have difficulty

communicating with and relating to people who see things and think another way.

Imagine you had to describe what a rose smells like to someone who lacks a

sense of smell. No matter how accurate your explanation, it will always fall

short of the actual experience. The same thing is true of differences in ways

of thinking. They are like blind spots, and if you have one (which we all do),

it can be challenging to see what’s there. Working through these differences

requires a lot of patience and open-mindedness, as well as triangulating with

other people who can help fill in the picture.

l. Pull all suspicious threads. It’s worth pulling all suspicious threads because: 1)

Small negative situations can be symptomatic of serious underlying

problems; 2) Resolving small differences of perception may prevent more

serious divergence of views; and 3) In trying to create a culture that values

excellence, constantly reinforcing the need to point out and stare at problems

—no matter how small—is essential (otherwise you risk setting an example

of tolerating mediocrity).

Prioritization can be a trap if it causes you to ignore the problems around

you. Allowing small problems to go unnoticed and unaddressed creates the

perception that it’s acceptable to tolerate such things. Imagine that all your

little problems are small pieces of trash you’re stepping over to get to the

other side of a room. Sure, what’s on the other side of the room may be very

important, but it won’t hurt you to pick up the trash as you come to it, and by

reinforcing the culture of excellence it will have positive second- and third-

order consequences that will reverberate across your whole organization.

While you don’t need to pick up every piece, you should never lose sight of

the fact that you’re stepping over the trash nor that it’s probably not as hard

as you think to pick up a piece or two as you go on your way.

m. Recognize that there are many ways to skin a cat. Your assessment of how

Responsible Parties are doing their jobs should not be based on whether

they’re doing it your way but whether they’re doing it in a good way. Be

careful about expecting a person who achieves success one way to do it a

different way. That’s like insisting that Babe Ruth improve his swing.

10.7 Think like an owner, and expect the people you

work with to do the same.

It’s a basic reality that if you don’t experience the consequences of your

actions, you’ll take less ownership of them. If you are an employee, and you

get a paycheck for turning up and pleasing your boss, your mind-set will

inevitably be trained to this cause-effect relationship. If you are a manager,

make sure you structure incentives and penalties that encourage people to

take full ownership of what they do and not just coast by. This includes

straightforward things such as spending money like it’s their own and making

sure their responsibilities aren’t neglected when they’re out of the office.

When people recognize that their own well-being is directly connected to that

of their community, the ownership relationship becomes reciprocal.

a. Going on vacation doesn’t mean one can neglect one’s responsibilities. Thinking

like an owner means making sure that your responsibilities are handled well

regardless of what comes up. While you are away on vacation, it’s your

responsibility to make sure nothing drops. You can do that via a combination

of good planning and coordination before you go and staying on top of things

while you are away. This needn’t take much time—it can be as little as an

hour of good checking from afar and it doesn’t even have to be every day, so

you can typically slip it in when it’s convenient.

b. Force yourself and the people who work for you to do difficult things. It’s a basic

law of nature: You must stretch yourself if you want to get strong. You and

your people must act with each other like trainers in gyms in order to keep

each other fit.

10.8 Recognize and deal with key-man risk.

Every key person should have at least one person who can replace him or her.

It’s best to have those people designated as likely successors and to have

them apprentice and help in doing those jobs.

10.9 Don’t treat everyone the same—treat them

appropriately.

It’s often said that it is neither fair nor appropriate to treat people differently.

But in order to treat people appropriately you must treat them differently.

That is because people and their circumstances are different. If you were a

tailor you wouldn’t give all of your customers the same size suit.

It is, however, important to treat people according to the same set of rules.

That’s why I’ve tried to flesh out Bridgewater’s principles in enough depth

that differences are accounted for. For example, if someone has worked at

Bridgewater for many years, that factors into how they are treated. Likewise,

while I find all dishonesty intolerable, I don’t treat all acts of dishonesty and

all people who are dishonest the same.

a. Don’t let yourself get squeezed. Plenty of people have threatened me over the

years by saying they’d quit, bring a lawsuit, embarrass me in the press—you

name it. While some people have advised me that it’s easier to just make such

things go away, I’ve found doing that is almost always shortsighted. Giving

in not only compromises your values, it telegraphs that the rules of the game

have changed and opens you up to more of the same. Fighting for what’s

right can be hard in the short term, of course. But I’m willing to take the

punch. What I worry about is doing the right thing and not about what people

think about me.

b. Care about the people who work for you. If you aren’t working with people

you care about and respect, your job probably isn’t the one for you. I will be

there for anyone who really needs me; when a whole community operates

this way, it is very powerful and rewarding. Personal contact at times of

personal difficulty is a must.

10.10 Know that great leadership is generally not

what it’s made out to be.

I don’t use the word “leadership” to describe what I do or what I think is

good because I don’t believe that what most people think of as “good

leadership” is effective. Most people think a good leader is a strong person

who engenders confidence in others and motivates them to follow him/her,

with the emphasis on “follow.” The stereotypical leader often sees

questioning and disagreement as threatening and prefers people do what

they’re told. As an extension of this paradigm, the leader bears the main

burden of decision making. But because such leaders are never as all-

knowing as they try to appear, disenchantment and even anger tends to set in.

That’s why people who once loved their charismatic leaders often want to get

rid of them.

This traditional relationship between “leaders” and “followers” is the

opposite of what I believe is needed to be most effective, and being

maximally effective is the most important thing a “leader” must do. It is more

practical to be honest about one’s uncertainties, mistakes, and weaknesses

than to pretend they don’t exist. It is also more important to have good

challengers than good followers. Thoughtful discussion and disagreement is

practical because it stress-tests leaders and brings what they are missing to

their attention.

One thing that leaders should not do, in my opinion, is be manipulative.

Sometimes leaders will use emotions to motivate people to do things that

they would not do after reflecting clearly. When dealing with intelligent

people in an idea meritocracy, it is essential that one always appeal to their

reason rather than their base emotions.

The most effective leaders work to 1) open-mindedly seek out the best

answers and 2) bring others along as part of that discovery process. That is

how learning and getting in sync occurs. A truly great leader is appropriately

uncertain but well equipped to deal with that uncertainty through open-

minded exploration. All else being equal, I think the kind of leader who looks

and acts like a skilled ninja will beat the kind of leader who looks and acts

like a muscular action hero every time.

a. Be weak and strong at the same time. Sometimes asking questions to gain

perspective can be misperceived as being weak and indecisive. Of course it’s

not. It’s necessary in order to become wise and it is a prerequisite for being

strong and decisive.

Always seek the advice of wise others and let those who are better than

you take the lead. The objective is to have the best understanding to make the

best possible leadership decisions. Be open-minded and assertive at the same

time and get in tight sync with those who work with you, recognizing that

sometimes not all or even the majority of people will agree with you.

b. Don’t worry about whether or not your people like you and don’t look to them to

tell you what you should do. Just worry about making the best decisions

possible, recognizing that no matter what you do, most everyone will think

you’re doing something—or many things—wrong. It is human nature for

people to want you to believe their own opinions and to get angry at you if

you don’t, even when they have no reason to believe that their opinions are

good. So, if you’re leading well, you shouldn’t be surprised if people disagree

with you. The important thing is for you to be logical and objective in

assessing your probabilities of being right.

It is not illogical or arrogant to believe that you know better than the

average person, so long as you are appropriately open-minded. In fact, it is

not logical to believe that what the average person thinks is better than what

you and the most insightful people around you think, because you have

earned your way into your higher-than-average position and you and those

insightful people are more informed than the average person. If the opposite

were true, then you and the average man shouldn’t have your respective jobs.

In other words, if you don’t have better insights than them, you shouldn’t be

a leader—and if you do have better insights than them, don’t worry if you are

doing unpopular things.

So how should you deal with your people? Your choices are either to

ignore them (which will lead to resentment and your ignorance of what they

are thinking), blindly do what they want (which wouldn’t be a good idea), or

encourage them to bring their disagreements to the surface and work through

them so openly and reasonably that everyone will recognize the relative

merits of your thinking. Have the open disagreement and be happy to either

win or lose the thought battles, as long as the best ideas win out. I believe that

an idea meritocracy will not only produce better results than other systems

but will also ensure more alignment behind appropriate yet unpopular

decisions.

c. Don’t give orders and try to be followed; try to be understood and to understand

others by getting in sync. If you want to be followed, either for egotistical

reasons or because you believe it more expedient to operate that way, you

will pay a heavy price in the long run. When you are the only one thinking,

the results will suffer.

Authoritarian managers don’t develop their subordinates, which means

those who report to them stay dependent. This hurts everyone in the long run.

If you give too many orders, people will likely resent them, and when you

aren’t looking, defy them. The greatest influence you can have over

intelligent people—and the greatest influence they will have on you—comes

from constantly getting in sync about what is true and what is best so that you

all want the same things.

10.11 Hold yourself and your people accountable and

appreciate them for holding you accountable.

Holding people accountable means understanding them and their

circumstances well enough to assess whether they can and should do some

things differently, getting in sync with them about that, and, if they can’t

adequately do what is required, removing them from their jobs. It is not

micromanaging them, nor is it expecting them to be perfect (holding

particularly overloaded people accountable for doing everything excellently

is often impractical, not to mention unfair).

But people can resent being held accountable, and you don’t want to have

to tell them what to do all the time. Reason with them so that they understand

the value of what you’re doing, but never let them off the hook.

a. If you’ve agreed with someone that something is supposed to go a certain way,

make sure it goes that way—unless you get in sync about doing it differently. People

will often subconsciously gravitate toward activities they like rather than

what’s required. If they lose sight of their priorities, you need to redirect

them. This is part of why it’s important to get frequent updates from people

about their progress.

b. Distinguish between a failure in which someone broke their “contract” and a

failure in which there was no contract to begin with. If you didn’t make an

expectation clear, you can’t hold people accountable for it not being fulfilled.

Don’t assume that something was implicitly understood. Common sense isn’t

actually all that common—be explicit. If responsibilities keep falling between

the cracks, consider editing the design of your machine.

c. Avoid getting sucked down. This occurs when a manager is pulled down to

doing the tasks of a subordinate without acknowledging the problem. The

sucked-down phenomenon bears some resemblance to job slip, since it

involves the manager’s responsibilities slipping into areas that should be left

to others. But while job slipping can make sense on a temporary basis to push

through to a goal, it’s also generally a signal that a part of the machine is

broken and needs fixing. The sucked-down phenomenon is what happens

when a manager chronically fails to properly redesign an area of

responsibility to keep him or herself from having to do the job that others

should be capable of doing well. You can tell this problem exists when the

manager focuses more on getting tasks done than on operating his or her

machine.

d. Watch out for people who confuse goals and tasks, because if they can’t make that

distinction, you can’t trust them with responsibilities. People who can see the

goals are usually able to synthesize too. One way to test this: If you ask a

high-level question like “How is goal XYZ going?” a good answer will

provide a synthesis up-front of how XYZ is going overall and, if needed, will

support it by accounting for the tasks that were done to achieve it. People

who see the tasks and lose sight of the goals will just describe the tasks that

were done.

e. Watch out for the unfocused and unproductive “theoretical should.” A

“theoretical should” occurs when people assume that others or themselves

should be able to do something when they don’t actually know whether they

can (as in “Sally should be able to do X, Y, Z”). Remember that to really

accomplish things you need believable Responsible Parties who have a track

record of success in the relevant area.

A similar problem occurs when people discuss how to solve a problem by

saying something vague and depersonalized like “We should do X, Y, Z.” It

is important to identify who these people are by name rather than with a

vague “we,” and to recognize that it is their responsibility to determine what

should be done.

It is especially pointless for a group of people who are not responsible to

say things like “We should . . .” to each other. Instead, those people should be

speaking to the Responsible Party about what should be done.

10.12 Communicate the plan clearly and have clear

metrics conveying whether you are

progressing according to it.

People should know the plans and designs within their departments. If you

decide to diverge from an agreed-upon path, be sure to communicate your

thoughts to the relevant parties and get their views so that you are all clear

about the new direction. This allows people to buy into the plan or express

their lack of confidence and suggest changes. It also makes clear what the

goals are and who is keeping up his or her end of the bargain and who is

falling short. Goals, tasks, and assigned responsibilities should be reviewed at

department meetings at least once a quarter, perhaps as often as once a

month.

a. Put things in perspective by going back before going forward. Before moving

forward with a new plan, take the time to reflect on how the machine has

been working up till now.

Sometimes people have problems putting current conditions into

perspective or projecting into the future. Sometimes they forget who or what

caused things to go well or poorly. By asking them to “tell the story” of how

we got here, or by telling the story yourself, you highlight important items

that were done well or poorly in relation to their consequences, draw

attention to the bigger picture and the overarching goals, specify the people

who are responsible for specific goals and tasks, and help achieve agreement.

Being able to connect all these items at multiple levels is essential for people

to understand the plan, give feedback on it, and eventually believe in it.

10.13 Escalate when you can’t adequately handle

your responsibilities . . .

. . . and make sure that the people who work for you are proactive about doing the

same. Escalating means saying you don’t believe you can successfully handle

a situation and that you are passing the Responsible Party job to someone

else. The person you are escalating to—the person to whom you report—can

then decide whether to coach you through it, take control themselves, have

someone else handle it, or do something else.

It’s critical that escalation not be seen as a failure but as a responsibility.

All Responsible Parties will eventually face tests that they don’t know

whether they can handle; what’s important is raising their concerns so their

boss knows about the risks and both the boss and the escalating RP can get in

sync about what to do about it. There is no greater failure than to fail to

escalate a responsibility you cannot handle. Make sure your people are

proactive; demand that they speak up when they can’t meet agreed-upon

deliverables or deadlines. Such communication is essential to get in sync both

on the case at hand and on what the person handling it is like.

11 Perceive and Don’t Tolerate

Problems

On your way to your goals, you will inevitably encounter problems. To be

successful you must perceive and not tolerate them. Problems are like coal

thrown into a locomotive engine because burning them up—inventing and

implementing solutions for them—propels us forward. Every problem you

find is an opportunity to improve your machine. Identifying and not

tolerating problems is one of the most important and disliked things people

can do.

For a lot of people identifying problems is difficult to do. Most people

would rather celebrate all the things that are going well while sweeping

problems under the rug. Those people have their priorities exactly backward,

and there is little that can be more harmful to an organization. Don’t

undermine your progress in pursuit of a pat on the back; celebrate finding out

what is not going well so you can make it go better. Thinking about problems

that are difficult to solve may make you anxious, but not thinking about them

(and therefore not dealing with them) should make you even more anxious.

Having this kind of anxiety about what can go wrong is extremely useful.

It is what drives one to develop systems and metrics for monitoring the

outcomes your machine is producing and motivates those who manage well

to constantly taste-test the outputs of the system and to look for problems in

its nooks and crannies. Having that constant worry and doing the double-

checking is important to maintaining quality control. Making sure that little

problems don’t exist is important because, if they’re allowed to continue,

they will grow into big problems. To convey the point, I will tell you about a

case in which we initially failed to maintain excellence, then perceived the

problem, got at its root causes, designed changes, and pushed those changes

through to produce excellent results.

When I started Bridgewater, I was responsible for everything. I made the

company’s investment decisions and its management decisions and then I

built the organization to support me and eventually to carry on excellently

without me. As Bridgewater grew, the standard I set was uncompromising

and straightforward: The analysis we provide to clients should always be of

the same quality it would be if I did it myself. That’s because when clients

ask what “we” think, they aren’t asking what just anyone thinks—they want

to know what I and the other CIOs, who are in charge of our investments, are

thinking. To achieve that goal, Bridgewater’s Client Service Department

either handles the questions they get from clients themselves or passes them

on to people with various levels of expertise who are assigned to answer

questions based on their level of difficulty. The client advisor (who is a

knowledgeable professional designed to be the interface between Bridgewater

and the client) has to understand the questions well enough to know who they

should be routed to, and they need to review the answers before they go back

to the client to ensure they are excellent. To be certain that always happens, I

created a checks-and-balances system in which some of our best investment

thinkers both draft memos to clients themselves and quality-control their

colleagues’ work, grading it to provide traceable metrics that can be followed

to monitor how well things are going and make changes as needed.

In 2011, as a part of my management transition, I handed the oversight of

this process to others, and several months later one of the people in the Client

Service Department began noticing problems. It started with one memo,

which two senior investment advisors noticed had gone out the door to a

client even though it contained errors. Though these were minor errors, they

were important errors to me. With my prodding, the new management team

began investigating other memos and discovered that this poorly prepared

memo wasn’t just a one-off; it was symptomatic of a more widespread

breakdown in the quality control machine. Worse still, the investigation

revealed the Responsible Parties were failing to perceive and diagnose these

problems. And most worrisome, it wasn’t clear that, without my pushing,

anyone else would have taken the time to investigate.

This initial failure to perceive and not tolerate problems did not happen for

lack of caring; it happened because most of the people in the process paid

more attention to getting the tasks done than assessing whether the goals

were being achieved. They had become more like rubber stampers than

craftsmen, while the top people who were supposed to “taste the soup” to

make sure it was excellent were focused on other things.

Discovering this was disappointing to all of us, because it showed that the

high standards that for so long had been the reasons for our success were

slipping. Facing this reality was painful, but ultimately healthy. The existence

of a problem like this one—whether from a flaw in the design of one’s

machine or from one’s own or others’ inabilities—is not shameful.

Acknowledging a weakness isn’t the same thing as accepting it. It’s a

necessary first step toward overcoming it. The pain one feels, whether from

shame and embarrassment, or frustration at one’s inability to get the better of

it, is like the pain one feels at getting flabby that motivates one to go to the

gym. As you’ll see in the following chapters, facing this problem led to

important innovations and improvements.

The following principles flesh out how to perceive and not tolerate the

problems that come your way.

11.1 If you’re not worried, you need to worry—and if

you’re worried, you don’t need to worry.

That’s because worrying about what can go wrong will protect you and not

worrying about what will go wrong will leave you exposed.

11.2 Design and oversee a machine to perceive

whether things are good enough or not good

enough, or do it yourself.

This is usually done by having the right people—people who will probe, who

can’t stand inferior work or products, and who can synthesize well—and by

having good metrics.

a. Assign people the job of perceiving problems, give them time to investigate, and

make sure they have independent reporting lines so that they can convey problems

without any fear of recrimination.Without these things in place, you can’t rely

on people raising all the problems you need to hear about.

b. Watch out for the “Frog in the Boiling Water Syndrome.” Apparently, if you

throw a frog into a pot of boiling water it will jump out immediately, but if

you put it in room-temperature water and gradually bring it to a boil, it will

stay in the pot until it dies. Whether or not that’s true of frogs, I see

something similar happen to managers all the time. People have a strong

tendency to slowly get used to unacceptable things that would shock them if

they saw them with fresh eyes.

c. Beware of group-think: The fact that no one seems concerned doesn’t mean nothing

is wrong. If you see something that seems unacceptable to you, don’t assume

that the fact that others also know about it and aren’t screaming means it’s

not a problem. This is an easy trap to fall into—and a deadly one. Whenever

you see badness, point it out to the Responsible Party and hold them

accountable for doing something about it. Never stop saying, “This meal

stinks!”

d. To perceive problems, compare how the outcomes are lining up with your goals.

This means comparing the outcomes that the machine is producing to your

visualization of the outcomes you expected so that you can note any

deviations. If you expect improvement to be within a specific range . . .

. . . and it ends up looking like this . . .

. . . you will know that you need to get at the root cause to deal with it. If

you don’t, the trajectory will probably continue.

e. “Taste the soup.” Think of yourself as a chef and taste the soup before it goes

out to the customers. Is it too salty or too bland? Managers need to do that

too, or have someone in their machine do it for them, for every outcome

they’re responsible for. People who are delegated this task are called “taste

testers.”

f. Have as many eyes looking for problems as possible. Encourage people to bring

problems to you. If everyone in your area feels responsible for the area’s

well-being and no one is afraid to speak up, you will learn about problems

when they are still easy to fix and haven’t caused serious damage. Stay in

sync with the people who are closest to the most important functions.

g. “Pop the cork.” It’s your responsibility to make sure communications from

your people flow freely, so encourage it by giving them plenty of

opportunities to speak up. Don’t just expect them to provide you with regular

and honest feedback—explicitly ask them for it.

h. Realize that the people closest to certain jobs probably know them best. At the

very least, they have perspectives you need to understand, so make sure you

see things through their eyes.

11.3 Be very specific about problems; don’t start with

generalizations.

For example, don’t say, “Client advisors aren’t communicating well with the

analysts.” Be specific: Name which client advisors aren’t doing this well and

in which ways. Start with the specifics and then observe patterns.

a. Avoid the anonymous “we” and “they,” because they mask personal responsibility.

Things don’t just happen by themselves—they happen because specific

people did or didn’t do specific things. Don’t undermine personal

accountability with vagueness. Instead of the passive generalization or the

royal “we,” attribute specific actions to specific people: “Harry didn’t handle

this well.” Also avoid “We should . . .” or “We are . . .” and so on. Since

individuals are the most important building blocks of any organization and

since individuals are responsible for the ways things are done, mistakes must

be connected to those individuals by name. Someone created the procedure

that went wrong or made the faulty decision. Glossing over that can only

slow progress toward improvement.

11.4 Don’t be afraid to fix the difficult things.

In some cases, people accept unacceptable problems because they are

perceived as too difficult to fix. Yet fixing unacceptable problems is a lot

easier than not fixing them, because not fixing them will lead to more stress,

more work, and chronic bad outcomes that could get you fired. So remember

one of the first principles of management: You need to look at the feedback

you’re getting on your machine and either fix your problems or escalate

them, if need be, over and over again. There is no easier alternative than

bringing problems to the surface and putting them in the hands of good

problem solvers.

a. Understand that problems with good, planned solutions in place are completely

different from those without such solutions. Unidentified problems are the worst;

identified problems without planned solutions are better, but worse for

morale; identified problems with a good planned solution are better still; and

solved problems are best. It’s really important to know which category a

problem belongs to. The metrics you use to track the progress of your

solution should be so clear and intuitive that they are obvious extensions of

the plan.

b. Think of the problems you perceive in a machinelike way. There are three steps

to doing this well: First, note the problem; then determine who the RPs to

raise it to are; and finally decide when the right time to discuss it is. In other

words: what, who, when. Then follow through.

12 Diagnose Problems to Get at

Their Root Causes

When you encounter problems, your objective is to specifically identify the

root causes of those problems—the specific people or designs that caused

them—and to see if these people or designs have a pattern of causing

problems.

What are the most common reasons for failing to diagnose well?

The most common mistake I see people make is dealing with their

problems as one-offs rather than using them to diagnose how their machine is

working so that they can improve it. They move on to fix problems without

getting at their root causes, which is a recipe for continued failure. A

thorough and accurate diagnosis, while more time-consuming, will pay huge

dividends in the future.

The second most common mistake people make is to depersonalize the

diagnosis. Not connecting problems to the people who failed and not

examining what it is about them that caused the failure will not lead to

improvements of the individuals or the machines.

The third biggest reason for failure is to not connect what one is learning

in one diagnosis to what was learned in prior ones. It is important to

determine whether the root cause of a particular problem (“Harry was

careless”) is part of a larger pattern (“Harry is often careless”) or not (“It’s

unlike Harry to be careless”).

In the case of our client service analytics team, I knew that unless we got

to the root cause of the problems, standards would continue to decline.

Bridgewater’s other leaders agreed. So I led a series of diagnostic sessions

with the team, getting everyone at every level into the room to probe and find

out what had gone wrong. I started with my mental map of how things

should’ve gone—based on the machine I’d built—and asked the new

managers to describe what had actually happened. Bad outcomes don’t just

happen; they occur because specific people make, or fail to make, specific

decisions. A good diagnosis always gets to the level of determining what it is

about those people that led to the bad outcomes. This can be uncomfortable

but if someone isn’t suited for a job, they need to be moved out of it so that

the same mistakes won’t keep occurring. Of course, nobody is perfect;

everyone makes mistakes. So it is important to look at people’s track records

and their specific strengths and weaknesses in doing a diagnosis.

Coming out of these sessions, a few things were clear: Several of the new

line managers who the top managers had brought in to run client service

analytics didn’t have the right skills, synthesis abilities, or levels of caring to

oversee the quality-control process; and the top managers were far too distant

from the area and not probing adequately to make sure that everything was

going well. This was the “what is”—the reality we faced that produced our

problems. It wasn’t a pretty picture, but it was exactly what we needed to

know in order to move to the next step of designing the changes we had to

make.

The following principles flesh out how to diagnose well, beginning with a

basic overview.

12.1 To diagnose well, ask the following questions:

1. Is the outcome good or bad?

2. Who is responsible for the outcome?

3. If the outcome is bad, is the Responsible Party incapable and/or is the design

bad?

If you keep those big questions in mind and anchor back to them, you

should do well. What follows is a guide for getting the answers to these big-

picture questions, mostly using a series of simple either/or questions to help

you get to the synthesis you are looking for at each step. You should think of

these as the answers you need before moving to the next step, leading all the

way to the final diagnosis.

You can, but don’t need to, follow these questions or this format exactly.

Depending on your circumstances, you may be able to move through these

questions quickly or you may need to ask some different, more granular

questions.

Is the outcome good or bad? And who is responsible for the outcome? If you

can’t quickly get in sync that the outcome was bad and who specifically was

responsible, you’re probably already headed for the weeds (in other words,

into a discussion of tiny, irrelevant details).

If the outcome is bad, is the RP incapable and/or is the design bad? The goal is to

come to this synthesis, though to get there you may need to examine how the

machine worked in this instance and build the synthesis from there.

How should the machine have worked? You may have a mental map of who

should have done what, or you may need to fill it in using other people’s

mental maps. In any case, you need to learn who was responsible for doing

what and what the principles say about how things should’ve gone. Keep it

simple! At this stage, a common pitfall is to delve into a granular

examination of procedural details rather than stay at the level of the machine

(the level of who was responsible for doing what). You should be able to

crystallize your mental map in just a few statements, each connected to a

specific person. If you are delving into details here, you are probably off

track. Once you’ve established the mental map the key question is:

Did the machine work as it should have? Yes or no.

If not, what didn’t go as it should have? What broke? This is called the proximate

cause and this step should be easy to get to if you laid out the mental map

clearly. You can do this via yes/no questions as well because it should just

require referring back to the key components of your mental map and

pinpointing which the RP or RPs didn’t do well.

Say your mental map of how the machine should have worked has two

steps: that Harry should have either 1) done his assignment on time or 2)

escalated that he couldn’t. All you have to do is pinpoint the two steps. 1) Did

he do it on time? Yes or no. And if not, 2) did he escalate? Yes or no.

It should be this simple. But this is when the conversation often gets

dragged into gobbledygook, where someone goes into a detailed explanation

of “what they did.” Remember: It’s your job to guide the conversation toward

an accurate and clear synthesis.

You also have to synthesize whether the problem was meaningful—that is,

whether a capable person would have made the same mistake given the

circumstances, or whether it’s symptomatic of something worth digging into.

Don’t focus too much on rare events or the trivial problems—nothing and no

one is perfect—but be sure you are not overlooking a clue to a systemic

machine problem. It’s your job to make that determination.

Why didn’t things go as they should have? This is where you have synthesized

the root cause in order to determine whether the RP is capable or not—or

whether the issue is with the design. In order to anchor back to a synthesis

rather than get lost in the details you might:

• Try to tie the failure to the 5-Step Process. Which step was not done

well? Everything ultimately fits into those five steps. But you may need

to get more specific, so:

• Try to crystallize the failure as a specific key attribute or set of

attributes. Ask yes/no questions: Did the RP not manage well? Not

perceive problems well? Not execute well?

• Importantly, ask yourself this question: If X attribute is done well next

time, will the bad outcome still occur? This is a good way of making

sure you are logically connecting the outcome back to the case. Think of

it this way: If your mechanic replaced that part in your car, would that

fix it?

• If the root cause is a faulty design, don’t stop there. Ask who was

responsible for the faulty design and whether they are capable of

designing well.

Is the root cause a pattern? (Yes or no.) Any problem can be a one-off

imperfection—or it could be a symptom of a root cause that will show up

repeatedly. You need to determine which it is. In other words, if Harry failed

to do the assignment due to reliability:

• Does Harry have a reliability problem in general?

• If so, is reliability required for the role?

• Is Harry’s failure due to training or abilities?

How should the people/machines evolve as a result? Confirm that the short-term

resolution of the issue has been addressed, as needed. Determine the steps to

be taken for long-term solutions and who is responsible for those steps.

Specifically:

• Are there responsibilities that need to be assigned or clarified?

• Are there machine designs that need to be reworked?

• Are there people whose fit for their roles needs to be reevaluated?

For example, if you’ve determined that 1) it’s a pattern, 2) the RP is

missing an attribute that’s required for the role, and 3) the attribute is missing

due to the RP’s ability (not their training)—then you’ve likely been able to

determine the answer to your most important question: the person is not

capable and needs to be sorted from the role.

The following principles further flesh out how to diagnose well.

a. Ask yourself: “Who should do what differently?” I often hear people

complaining about a particular outcome without attempting to understand the

machine that caused it. In many cases, these complaints come from people

who are seeing the cons of some decision but not the pros and don’t know

how the Responsible Party weighed them to come to a decision. Since all

outcomes ultimately come from people and designs, asking yourself “Who

should do what differently?” will point you in the direction of the kind of

understanding that you need to actually change outcomes in the future (versus

just chirping about them).

b. Identify at which step in the 5-Step Process the failure occurred. If a person is

chronically failing, it is due to a lack of training or a lack of ability. Which is

it? At which of the five steps did the person fail? Different steps require

different abilities and if you can identify which abilities are lacking, you’ll go

a long way toward diagnosing the problem.

c. Identify the principles that were violated. Identify which principles apply to the

case at hand, review them, and see if they would have helped. Think for

yourself which principles are best for handling similar cases. This will help

solve not only this problem but other problems like it.

d. Avoid Monday morning quarterbacking. Evaluate the merits of a past decision

based not on what you know now but only on what you could have

reasonably known at the time the decision was made. Every decision has pros

and cons; you can’t evaluate choices in retrospect without the appropriate

context. Do this by asking yourself, “What should a quality person have

known and done in that situation?” Also, have a deep understanding of the

person who made the decision (how they think, the type of person they are,

whether they learned from the situation, and so on).

e. Don’t confuse the quality of someone’s circumstances with the quality of their

approach to dealing with the circumstances. One can be good and the other can

be bad, and it’s easy to confuse which is which. Such confusion is especially

common in organizations that are doing new things and evolving fast but

haven’t yet gotten the kinks out.

I have always described Bridgewater as being “terrible and terrific at the

same time.” For nearly forty years, we have consistently produced

extraordinary results while struggling with lots of problems. It is easy to look

at messy circumstances, think things must be terrible, and get frustrated. But

the real challenge is to look at the long-term successes these messy

circumstances have produced and understand how essential they are to the

evolutionary process of innovation.

f. Identifying the fact that someone else doesn’t know what to do doesn’t mean that

you know what to do. It’s one thing to point out a problem; it’s another to have

an accurate diagnosis and a quality solution. As described earlier, the litmus

test for a good problem solver is 1) they are able to logically describe how to

handle the problem and 2) they have successfully solved similar problems in

the past.

g. Remember that a root cause is not an action but a reason. Root causes are

described in adjectives, not verbs, so keep asking “why” to get at them. Since

most things are done or not done because someone decided to do them or not

do them in a certain way, most root causes can be traced to specific people

who have specific patterns of behavior. Of course, a normally reliable person

can make the occasional error and if that’s the case, then it can be forgiven,

but when a problem is attributable to a person, you have to ask why they

made the mistake—and you have to be as accurate in diagnosing a fault in a

person as you would be if he or she were a piece of equipment.

A root cause discovery process might proceed like this:

The problem was due to bad programming.

Why was there bad programming?

Because Harry programmed it badly.

Why did Harry program it badly?

Because he wasn’t well trained and because he was in a rush.

Why wasn’t he well trained? Did his manager know that he wasn’t well

trained and let him do the job anyway, or did he not know?

Consider how personal the questioning is. It doesn’t stop at “Because

Harry programmed it badly.” You must go deeper in order to understand

what about the people and/or the design led to the failure. This is difficult for

both the diagnoser and the RPs, and it often results in people bringing up all

kinds of irrelevant details. Be on your guard because people will often look to

cover themselves by diving into the weeds.

h. To distinguish between a capacity issue and a capability issue, imagine how the

person would perform at that particular function if they had ample capacity. Think

back on how the person performed in similar functions when they had ample

capacity. If the same kinds of problems came up, then the problem is very

likely one of capabilities.

i. Keep in mind that managers usually fail or fall short of their goals for one (or more)

of five reasons.

1. They are too distant.

2. They have problems perceiving bad quality.

3. They have lost sight of how bad things have become because they have

gotten used to it.

4. They have such high pride in their work (or such large egos) that they

can’t bear to admit they are unable to solve their own problems.

5. They fear adverse consequences from admitting failure.

12.2 Maintain an emerging synthesis by diagnosing

continuously.

If you don’t look into significant bad outcomes as they occur, you won’t be

able to understand what things they are symptomatic of or how they are

changing through time—i.e., are they getting better or worse?

12.3 Keep in mind that diagnoses should produce

outcomes.

If they don’t, there’s no purpose to them. At a minimum, a diagnosis should

take the form of theories about root causes and clarity about what information

needs to be gathered to find out more. At best, it should lead directly to a plan

or design to fix the problem or problems.

a. Remember that if you have the same people doing the same things, you should

expect the same results. Einstein defined insanity as doing the same thing over

and over and expecting different results. Don’t fall into this trap because

you’ll have a hard time getting out of it.

12.4 Use the following “drill-down” technique to gain

an 80/20 understanding of a department or

sub-department that is having problems.

A drill-down is a process that allows you to gain an understanding of the root

causes of the biggest problems in a department or area so you can design a

plan to make the area excellent. Drill-downs are not diagnoses, but a form of

broad and deep probing. They’re not intended to uncover the causes of every

problem: only the 20 or so percent of causes that produce 80 percent of the

suboptimal effects. A drill-down takes place in two steps and is then followed

by design and execution steps. If done well, the two drill-down steps can be

done in about four hours. It is very important that the steps be done separately

and independently, so as not to go in too many directions at once. Let me take

you through the drill-down process, offering guidance and examples for each

step.

Step 1: List the Problems. Quickly inventory all the core problems. Be very

specific, as this is the only way to effectively find solutions. Don’t generalize

or use the plural “we” or “they.” Name the names of the people experiencing

the problems.

• Have all the relevant people from the area under scrutiny participate in

the drill-down; you will benefit from their insights and it will drive their

ownership of the solution.

• Don’t focus on rare events or the trivial problems—nothing is perfect—

but be sure they are not symptoms of systematic machine problems.

• Don’t try to find solutions yet. Your focus in this step is strictly on listing

the problems.

Step 2: Identify the Root Causes. For each problem, identify the deep-seated

reason behind the actions that caused each problem. Most problems happen

for one of two reasons: 1) It isn’t clear who the Responsible Party is, or 2)

The Responsible Party isn’t handling his/her responsibilities well.

You must distinguish proximate causes from root causes. Proximate

causes are the reasons or actions that led to the problem. When you start

describing the qualities behind these reasons or actions, you are getting closer

to the root cause.

To get at the root cause, keep asking “Why?” For example:

Problem:

The team is continually working late and is on the verge of burning out.

Why?

Because we don’t have enough capacity to meet the demand put on the

team.

Why?

Because we inherited this new responsibility without additional staff.

Why?

Because the manager did not understand the volume of work before

accepting the responsibility.

Why?

Because the manager is bad at anticipating problems and creating plans.

[Root Cause]

Do not exclude any relevant people from the drill-down: Besides losing

the benefit of their ideas, you’ll disenfranchise them from the game plan and

reduce their sense of ownership. At the same time, remember that people tend

to be more defensive than self-critical. It is your job as a manager to get at

truth and excellence, not to make people happy. For example, the correct path

might be to fire some people and replace them with better people, or put them

in jobs they might not want. Everyone’s objective must be to get at the best

answers, not the answers that will make the most people happy.

You may find that multiple problems identified in Step 1 share the same

root cause. Because you are doing a drill-down in a quick session, your root

cause diagnoses may only be provisional—essentially alerts about things to

watch out for.

When Step 2 is completed, take a break to reflect; then come up with a

plan.

Step 3: Create a Plan. Step away from the group and develop a plan that

addresses the root causes. Plans are like movie scripts, where you visualize

who will do what through time to achieve the goals. They are developed by

iterating through multiple possibilities, weighing the likelihood of goal

achievement versus costs and risks. They should have specific tasks,

outcomes, Responsible Parties, tracking metrics, and timelines. Allow the key

people involved to discuss the plan thoroughly. Not everyone needs to agree

on the plan but the Responsible Parties and other key people must be in sync.

Step 4: Execute the Plan. Execute the agreed-upon plan and transparently track

its progress. At least monthly, report on the planned and actual progress to

date and the expectations for the coming period, and hold people publicly

accountable for delivering their outcomes successfully and on time. Make

adjustments to the plan as required to reflect reality.

12.5 Understand that diagnosis is foundational to

both progress and quality relationships.

If you and others are open-minded and engage in a quality back-and-forth,

not only will you find better solutions, you will also get to know each other

better. It is an opportunity for you to assess your people and to help them

grow—and vice versa.

13 Design Improvements to

Your Machine to Get Around

Your Problems

Once you’ve successfully diagnosed the problems standing in the way of

your achieving your goals, you need to design paths for solving them.

Designs need to be based on deep and accurate understandings (which is why

diagnosis is so important); for me, it’s an almost visceral process of staring at

problems and using the pain they cause me to stimulate my creative thinking.

This is exactly how it was for the team responsible for client service

analytics—and especially for Bridgewater’s co-CEO David McCormick, who

was then head of the Client Service Department. Coming out of the

diagnosis, he moved quickly to design and implement changes. He fired the

team members who had allowed standards to slip and reflected deeply on

what new designs he could implement to get the right people into the right

roles. In selecting his new Responsible Parties for client service analytics, he

picked one of our top investment thinkers who also had extremely high

standards (and was very outspoken about cases where he saw them slipping)

and paired him with one of our most experienced managers, who knew how

to build the right process flows and make sure everything that needed to

happen would go precisely as planned.

But that wasn’t all. When coming up with a design, it’s impor-tant to take

time to reflect and make sure you’re looking at the problems from the highest

level. David knew it would be a mistake to look only at this one part of the

department, because the same slip in quality that had happened there was

likely to have occurred in other places too. He needed to think creatively to

come up with a design that would build a durable culture of pervasive

excellence throughout the entire department. This led to his invention of

“Quality Day,” biannual meetings in which members of the Client Service

Department would review each other’s mock presentations and memos and

give direct feedback on what was good and what wasn’t. More importantly,

the meetings were a chance to step back and assess whether the ways of

ensuring quality were working as expected—by bringing in a bunch of tough,

independent thinkers to offer criticism and get the process realigned on what

good looks like.

Of course, there were many more details to all of David’s plans for

transforming the department. But the important thing is how all the details

and plans extended from a high-level visualization of what was required.

Only when you have such a sketch can you begin to fill it in with specifics.

Those specifics will be your tasks; write them down so you don’t forget

them.

While the best designs are drawn from a rich understanding of actual

problems, when you’re just starting out on something, you often have to

design based on anticipated problems as opposed to actual ones. That’s why

having systematic ways of tracking issues (the Issue Log) and what people

are like (the Dot Collector) is so useful: Instead of just relying on your best

guesses of what might go wrong, you can look at data from prior “at bats” for

yourself and others and come to the design process with understanding rather

than having to start from scratch.

The most talented designers I know are people who can visualize over

time, running through different collections of people from the scale of small

teams to entire organizations, accurately anticipating the kinds of results

they’ll produce. They excel at design and systemization. Hence the

overriding principle of this chapter: Design and systemize your machine.

Creativity is also important to this process, as is character, because the most

important problems to design around are often the hardest, and you need to

come up with original ways of addressing them and be willing to make hard

choices (especially when it comes to people and who should do what).

The following principles delve into designing and how to do it well.

13.1 Build your machine.

Focus on each task or case at hand and you will be stuck dealing with them

one by one. Instead, build a machine by observing what you’re doing and

why, extrapolating the relevant principles from the cases at hand, and

systemizing that process. It typically takes about twice as long to build a

machine as it does to resolve the task at hand, but it pays off many times over

because the learning and efficiency compound into the future.

13.2 Systemize your principles and how they will be

implemented.

If you have good principles that guide you from your values to your day-to-

day decisions but you don’t have a systematic way of making sure they’re

regularly applied, they’re not of much use. It’s essential to build your most

important principles into habits and help others do so as well. Bridgewater’s

tools and culture are designed to do just that.

a. Create great decision-making machines by thinking through the criteria you are

using to make decisions while you are making them.Whenever I make an

investment decision, I observe myself making it and think about the criteria I

used. I ask myself how I would handle another one of those situations and

write down my principles for doing so. Then I turn them into algorithms. I

am now doing the same for management and I have gotten in the habit of

doing it for all my decisions.

Algorithms are principles in action on a continuous basis. I believe that

systemized, evidence-based decision making will radically improve the

quality of management. Human managers process information spontaneously

using poorly thought-out criteria and are unproductively affected by their

emotional biases. These all lead to suboptimal decisions. Imagine what it

would be like to have a machine that processes high-quality data using high-

quality decision-making principles/criteria. Like the GPS in your car, it

would be invaluable, whether you follow all of its suggestions or not. I

believe that such tools will be essential in the future, and as I write these

words, I am a short time away from getting a prototype online.

13.3 Remember that a good plan should resemble a

movie script.

The more vividly you can visualize how the scenario you create will play out,

the more likely it is to happen as you plan. Visualize who will do what when

and the result they’ll produce. This is your mental map of your machine.

Recognize that some people are better or worse at visualization. Accurately

assess your own abilities and those of others so you can use the most capable

people to create your plans.

a. Put yourself in the position of pain for a while so that you gain a richer

understanding of what you’re designing for. Either literally or vicariously

(through reading reports, job descriptions, etc.), temporarily insert yourself

into the workflow of the area you’re looking at to gain a better understanding

of what it is that you are dealing with. As you design, you’ll be able to apply

what you’ve learned, and revise the machine appropriately as a result.

b. Visualize alternative machines and their outcomes, and then choose. A good

designer is able to visualize the machine and its outcomes in various

iterations. First they imagine how Harry, Larry, and Sally can operate in

various ways with various tools and different incentives and penalties; then

they replace Harry with George, and so on, thinking through what the

products and people and finances would look like month by month (or

quarter by quarter) under each scenario. Then they choose.

c. Consider second- and third-order consequences, not just first-order ones. The

outcome you get as a first-order consequence might be desirable, while the

second- or third-order consequences could be the opposite. So focusing solely

on first-order consequences, which people tend to do, can lead to bad

decision making. For example, if you asked me if I’d like to not have rainy

days, I probably would say yes if I didn’t consider the second- and third-

order consequences.

d. Use standing meetings to help your organization run like a Swiss clock. Regularly

scheduled meetings add to overall efficiency by ensuring that important

interactions and to-do’s aren’t overlooked, eliminating the need for inefficient

coordination, and improving operations (because repetition leads to

refinement). It pays to have standardized meeting agendas that ask the same

feedback questions in each meeting (such as how effective the meeting was)

and nonstandard meeting agendas that include things done infrequently (such

as quarterly budget reviews).

e. Remember that a good machine takes into account the fact that people are

imperfect. Design in such a way that you produce good results even when

people make mistakes.

13.4 Recognize that design is an iterative process.

Between a bad “now” and a good “then” is a

“working through it” period.

That “working through it” period is when you try out different processes and

people, seeing what goes well or poorly, learning from the iterations, and

moving toward the ideal systematic design. Even with a good future design

picture in mind, it will naturally take some mistakes and learning to get to a

good “then” state.

People frequently complain about this kind of iterative process because it

tends to be true that people are happier with nothing at all than with

something imperfect, even though it would be more logical to have the

imperfect thing. That kind of thinking doesn’t make sense, so don’t let it

distract you.

a. Understand the power of the “cleansing storm.” In nature, cleansing storms are

big infrequent events that clear out all the overgrowth that’s accumulated

during good times. Forests need these storms to be healthy—without them,

there would be more weak trees and a buildup of overgrowth that stifles other

growth. The same is true for companies. Bad times that force cutbacks so

only the strongest and most essential employees (or companies) survive are

inevitable and can be great, even though they seem terrible at the time.

13.5 Build the organization around goals rather than

tasks.

Giving each department a clear focus and the appropriate resources to

achieve its goals makes the diagnosis of resource allocations more

straightforward and reduces job slip. As an example of how this works, at

Bridgewater we have a Marketing Department (goal: to market) that is

separate from our Client Service Department (goal: to service clients), even

though they do similar things and there would be advantages to having them

work together. But marketing and servicing clients are two distinct goals; if

they were merged, the department head, salespeople, client advisors, analysts,

and others would be giving and receiving conflicting feedback. If asked why

clients were receiving relatively poor attention, the answer might be: “We

have incentives to raise sales.” If asked why they weren’t making sales, the

merged department might explain that they need to take care of their clients.

a. Build your organization from the top down. An organization is the opposite of

a building: Its foundation is at the top, so make sure you hire managers before

you hire their reports. Managers can help design the machine and choose the

people who complement it. People overseeing departments need to be able to

think strategically as well as run the day-to-day. If they don’t anticipate

what’s coming up, they’ll run the day-to-day off a cliff.

b. Remember that everyone must be overseen by a believable person who has high

standards. Without strong oversight, there is potential for inadequate quality

control, inadequate training, and inadequate appreciation of excellent work.

Never just trust people to do their jobs well.

c. Make sure the people at the top of each pyramid have the skills and focus to

manage their direct reports and a deep understanding of their jobs. A few years

ago, someone at Bridgewater proposed that our facilities group (the people

who take care of the building and grounds, food service, office supplies, etc.)

should begin to report to our head of technology because of the overlap in the

two areas (computers are a facility too, they use electricity, and so on). But

having the people who are responsible for janitorial services and meals report

to a technology manager would be as inappropriate as having technology

people report to the person taking care of facilities. These functions, even if

they’re considered “facilities” in the broadest sense, are very different, as are

the respective skill sets. Similarly, at another time, we talked about putting

the folks who work on client agreements under the same manager as those

who do counterparty agreements. But that would have been a mistake

because the skills required to reach agreements with clients are very different

from the skills required to reach agreements with counterparties. It would be

wrong to conflate both departments under the general heading of

“agreements,” because each calls for specific knowledge and skills.

d. In designing your organization, remember that the 5-Step Process is the path to

success and that different people are good at different steps. Assign specific people

to do each of these steps based on their natural inclinations.

For example, the big-picture visionary should be responsible for goal

setting, the taste tester should be assigned the job of identifying and not

tolerating problems, the logical detective who doesn’t mind probing people

should be the diagnoser, the imaginative designer should craft the plan to

make the improvements, and the reliable taskmaster should make sure the

plan gets executed. Of course, some people can do more than one of these

things—generally people do two or three well. Virtually nobody can do them

all well. A team should consist of people with all of these abilities and they

should know who is responsible for which steps.

e. Don’t build the organization to fit the people. Managers will often take the

people who work in their organization as a given and try to make the

organization work well with them. That’s backward. Instead, they should

imagine the best organization and then make sure the right people are chosen

for it. Jobs should be created based on the work that needs to be done, not

what people want to do or which people are available. You can always search

outside to find the people who click best for a particular role. First come up

with the best workflow design, then sketch it out on an organizational chart,

visualize how the parts interact, and specify what qualities are required for

each job. Only after all that is done should you choose the people to fill the

slots.

f. Keep scale in mind. Your goals must be the right size to warrant the resources

that you allocate to them. An organization might not be big enough to justify

having both a sales and an analytics group, for example. Bridgewater

successfully evolved from a one-cell organization, in which most people were

involved in everything, to a multi-cellular organization because we retained

our ability to focus efficiently as we grew.

Temporarily sharing or rotating resources is fine and is not the same as a

merging of responsibilities. On the other hand, the efficiency of an

organization decreases as the number of people and/or its complexity

increases, so keep things as simple as possible. And the larger the

organization, the more important are information technology management

and cross-departmental communication.

g. Organize departments and sub-departments around the most logical groupings

based on “gravitational pull.” Some groups naturally gravitate toward one

another. That gravitational pull might be based on common goals, shared

abilities and skills, workflow, physical location, and so forth. Imposing your

own structure without acknowledging these magnetic pulls will likely result

in inefficiency.

h. Make departments as self-sufficient as possible so that they have control over the

resources they need to achieve their goals. We do this because we don’t want to

create a bureaucracy that forces departments to requisition resources from a

pool that lacks the focus to do the job.

i. Ensure that the ratios of senior managers to junior managers and of junior

managers to their reports are limited to preserve quality communication and mutual

understanding. Generally, the ratio should not be more than 1:10, and

preferably closer to 1:5. Of course, the appropriate ratio will vary depending

on how many people your direct reports have reporting to them, the

complexity of the jobs they’re doing, and a manager’s ability to handle

several people or projects at once. The number of layers from top to bottom

and the ratio of managers to their direct reports will limit the size of an

effective organization.

j. Consider succession and training in your design. This is a subject I wish I had

thought about much earlier in my career. To ensure that your organization

continues to deliver results, you need to build a perpetual motion machine

that can work well without you. This involves more than the mechanics of

your own “stepping out,” but the selection and training and governance of the

new leaders who “step up,” and most importantly, the preservation of the

culture and its values.

The best approach I’ve seen for doing this is what companies and

organizations like GE, 3G, and the Chinese Politburo do, which is to build a

pyramid-like “succession pipeline” in which the next generation of leaders is

exposed to the thinking and decision making of the current leaders so they

can both learn and be tested.

k. Don’t just pay attention to your job; pay attention to how your job will be done if

you are no longer around. I wrote about key-man risk earlier, which applies the

most to those with the largest areas of responsibility, especially the head of

an organization. If that’s you, then you should designate the people who

could replace you and have them do your job for a while so they can be

vetted and tested. These results should be documented in a manual that the

appropriate people can go to if you should be hit by a bus. If all the key

people in the organization do this, you will have a strong “farm team,” or at

least a clear understanding of vulnerabilities and a plan to deal with them.

Remember that a ninja manager is somebody who can sit back and watch

beauty happen—i.e., an orchestrator. If you are always trying to hire

somebody who is as good as or better than you at your job, that will both free

you up to go on to other things and build your succession pipeline.

Beyond that, visualizing your replacement is an enlightening and

productive experience. In addition to taking stock of what you are doing and

coming up with both bad and good names, you will start to think about how

to get your best people into slots that don’t yet exist. Knowing that you will

have to test them by letting them do your job without interference, you will

be motivated to train them properly before the test. And, of course, the stress-

testing will help you learn and adapt, which will lead to better results.

l. Use “double-do” rather than “double-check” to make sure mission-critical tasks are

done correctly. Double-checking has a much higher rate of errors than double-

doing, which is having two different people do the same task so that they

produce two independent answers. This not only ensures better answers but

will allow you to see the differences in people’s performance and abilities. I

use double-do’s in critical areas such as finance, where large amounts of

money are at risk.

And because an audit is only as effective as the auditor is knowledgeable,

remember that a good double-check can only be done by someone capable of

double-doing. If the person double-checking the work isn’t capable of doing

the work himself, how could he possibly evaluate it accurately?

m. Use consultants wisely and watch out for consultant addiction. Sometimes hiring

an external consultant is the best fit for your design. Doing so can get you

precisely the amount of specialized expertise you need to tackle a problem.

When you can outsource you don’t have to worry about managing, and that’s

a real advantage. If a position is part-time and requires highly specialized

knowledge, I would prefer to have it done by consultants or outsiders.

At the same time, you need to beware of the chronic use of consultants to

do work that should be done by employees. This will cost you in the long run

and erode your culture. Also make sure you are careful not to ask consultants

to do things that they don’t normally do. They will almost certainly revert to

doing things in their usual way; their own employers will demand that.

When evaluating whether to use a consultant, consider the following

factors:

1. Quality Control. When someone doing work for you is an employee,

you are responsible for the quality of their work. But when the person

working for you works for another company, you’re operating by their

standards, so it’s important to know whether their standards are as high

or higher than yours.

2. Economics. If a full-time person is required, it is almost certainly more

cost-effective to create a position. Consultants’ daily rates add up to

considerably more than the annualized cost of a full-time person.

3. Institutionalization of Knowledge. Someone who is around your

environment on an ongoing basis will gain knowledge and an

appreciation of your culture that no outsider can.

4. Security. Having outsiders do the job substantially increases your

security risks, especially if you can’t see them at work (and monitor

whether they follow proper precautions, like not leaving sensitive

documents on their desks).

You have to consider whether you should be outsourcing or developing

capabilities in-house. Though temps and consultants are good for a quick fix,

they won’t augment your capacities in the long term.

13.6 Create an organizational chart to look like a

pyramid, with straight lines down that don’t

cross.

The whole organization should look like a series of descending pyramids, but

the number of layers should be limited to minimize hierarchy.

a. Involve the person who is the point of the pyramid when encountering cross-

departmental or cross-sub-departmental issues. Imagine an organizational chart

as a pyramid that consists of numerous pyramids.

When issues involve parties not in the same part of the pyramid, it is

generally desirable to involve the person who is at the point of the pyramid,

and thus has the perspective and knowledge to weigh the trade-offs and make

informed decisions.

b. Don’t do work for people in another department or grab people from another

department to do work for you unless you speak to the person responsible for

overseeing the other department. If there is a dispute about this, it needs to be

resolved at the point of the pyramid.

c. Watch out for “department slip.” This happens when a support department

mistakes its responsibility to provide support with a mandate to determine

how the thing they are supporting should be done. An example of this sort of

mistake would be if the facilities group thought it should determine what

facilities we should have. While support departments should know the goals

of the people they’re supporting and provide feedback regarding possible

choices, they are not the ones to determine the vision.

13.7 Create guardrails when needed—and remember

it’s better not to guardrail at all.

Even when you find people who are great clicks for your design, there will be

times when you’ll want to build guardrails around them. No one is perfect,

everyone has strengths and weaknesses, and as hard as you look, you won’t

always be able to find everything you want in one person. So look down on

your machine and the people you choose for your roles, and think about

where you might need to supplement your design by adding people or

processes to ensure that each job is done excellently.

Remember, guardrailing is meant to help people who can by and large do

their jobs well—it’s intended to help good people perform better, not to help

failing people reach the bar. If you’re trying to guardrail someone who is

missing the core abilities required for their job, you should probably just fire

them and look for someone else who will be a better click.

A good guardrail typically takes the form of a team member whose

strengths compensate for the weaknesses of the team member who needs to

be guardrailed. A good guardrailing relationship should be firm without being

overly rigid. Ideally, it should work like two people dancing—they’re

literally pushing against each other, but with a lot of mutual give-and-take.

Of course, having someone in a job who needs to be guardrailed is not as

good as having someone in a job who will naturally do the right things. Strive

for that.

a. Don’t expect people to recognize and compensate for their own blind spots. I

constantly see people form wrong opinions and make bad decisions, even

though they’ve made the same kinds of mistakes before—and even though

they know that doing so is illogical and harmful. I used to think that they

would avoid these pitfalls when they became aware of their blind spots, but

typically that’s not the case. Only very rarely do I hear someone recuse

himself from offering an opinion because they aren’t capable of forming a

good one in a particular area. Don’t bet on people to save themselves;

proactively guardrail them or, better yet, put them in roles in which it’s

impossible for them to make the types of decisions they shouldn’t make.

b. Consider the clover-leaf design. In situations where you’re unable to identify

one excellent Responsible Party for a role (which is always best), find two or

three believable people who care deeply about producing excellent results

and are willing to argue with each other and escalate their disagreements if

necessary. Then set up a design in which they check and balance each other.

Though it’s not optimal, such a system will have a high probability of

effectively sorting the issues you need to examine and resolve.

13.8 Keep your strategic vision the same while

making appropriate tactical changes as

circumstances dictate.

Bridgewater’s values and strategic goals have been the same since the

beginning (to produce excellent results, meaningful work, and meaningful

relationships through radical truth and transparency) but its people, systems,

and tools have changed over forty-plus years as we have grown from a one-

person company to a 1,500-person organization—and they can continue to

change while maintaining values and strategic goals as newer generations

replace older ones. That can happen for organizations in much the same way

as it happens for families and communities. To help nurture that, it is

desirable to reinforce the traditions and reasons for them, as well as to make

sure the values and strategic goals are imbued in the successive leaders and

the population as a whole.

a. Don’t put the expedient ahead of the strategic. People often tell me they can’t

deal with the longer-term strategic issues because they have too many

pressing issues they need to solve right away. But rushing into ad hoc

solutions while kicking the proverbial can down the road is a “path to

slaughter.” Effective managers pay attention both to imminent problems and

to problems that haven’t hit them yet. They constantly feel the tug of the

strategic path because they worry about not getting to their ultimate goal and

they are determined to continue their process of discovery until they do.

While they might not have the answer right away, and they might not be able

to come up with it by themselves, through a combination of creativity and

character they eventually make all the necessary upward loops.

b. Think about both the big picture and the granular details, and understand the

connections between them. Avoid fixating on irrelevant details. You have to

determine what’s important and what’s unimportant at each level. For

example, imagine you are designing a house. First you need to start with the

big picture: Your house will sit on a plot of land, and you have to think

through where the water comes from, how the house gets hooked up to the

power grid, and so on. Then you need to decide how many rooms it will

have, where the doors will go, where you need windows, and so on. When

designing the plan, you need to think about all of these things and connect

them, but that doesn’t mean that you actually need to go out and pick the

hinges for the door yourself. You just need to know that you’ll need a door

with hinges and how it fits into the bigger picture of the house.

13.9 Have good controls so that you are not exposed

to the dishonesty of others.

Don’t assume that people are operating in your interest rather than their own.

A higher percentage of the population than you might imagine will cheat if

given the opportunity. When offered the choice of being fair with you or

taking more for themselves, most people will take more for themselves. Even

a tiny amount of cheating is intolerable, so your happiness and success will

depend on your controls. I have repeatedly learned this lesson the hard way.

a. Investigate and let people know you are going to investigate. Investigate and

explain to people that you are going to investigate so there are no surprises.

Security controls should not be taken personally by the people being checked,

just like a teller shouldn’t view the bank counting the money in the drawer

(rather than just accepting the teller’s count) as an indication that the bank

thinks the teller is dishonest. Explain that concept to employees so that they

understand it.

But even the best controls will never be foolproof. For that reason (among

many others), trustworthiness is a quality that should be appreciated.

b. Remember that there is no sense in having laws unless you have policemen

(auditors). The people doing the auditing should report to people outside the

department being audited, and auditing procedures should not be made

known to those being audited. (This is one of our few exceptions to radical

transparency.)

c. Beware of rubber-stamping. When a person’s role involves reviewing or

auditing a high volume of transactions or things that other people are doing,

there’s a real risk of rubber-stamping. One particularly risky example is

expense approvals. Make sure you have ways to audit the auditors.

d. Recognize that people who make purchases on your behalf probably will not spend

your money wisely. This is because 1) it is not their money and 2) it is difficult

to know what the right price should be. For example, if somebody proposes a

price of $125,000 for a consulting project, it is unpleasant, difficult, and

confusing to figure out what the market rate is and then negotiate a better

price. But the same person who’s reluctant to negotiate with the consultant

will bargain furiously when he is hiring someone to paint his own house. You

need to have proper controls, or better yet, a part of the organization that

specializes in this kind of thing. There’s retail and there’s wholesale. You

want to pay wholesale whenever possible.

e. Use “public hangings” to deter bad behavior. No matter how carefully you

design your controls and how rigorously you enforce them, malicious and

grossly negligent people will sometimes find a way around them. So when

you catch someone violating your rules and controls, make sure that

everybody sees the consequences.

13.10 Have the clearest possible reporting lines and

delineations of responsibilities.

This applies both within and between departments. Dual reporting causes

confusion, complicates prioritization, diminishes focus on clear goals, and

muddies the lines of supervision and accountability—especially when the

supervisors are in two different departments. When situations require dual

reporting, managers need to be informed. Asking someone from another

department to do a task without consulting with his or her manager is strictly

prohibited (unless the request will take less than an hour or so). However,

appointing co-heads of a department or a sub-department can work well if the

managers are in sync and combine complementary and essential strengths;

dual reporting in that case can work well if properly coordinated.

a. Assign responsibilities based on workflow design and people’s abilities, not job

titles. Just because someone is responsible for “Human Resources,”

“Recruiting,” “Legal,” “Programming,” and so forth, doesn’t necessarily

mean they are the appropriate person to do everything associated with those

functions. For example, though HR people help with hiring, firing, and

providing benefits, it would be a mistake to give them the responsibility of

determining who gets hired and fired and what benefits are provided to

employees.

b. Constantly think about how to produce leverage. Leverage in an organization is

not unlike leverage in the markets; you’re looking for ways to achieve more

with less. At Bridgewater, I typically work at about 50:1 leverage, meaning

that for every hour I spend with each person who works for me, they spend

about fifty hours working to move the project along. At our sessions, we go

over the vision and the deliverables, then they work on them, and then we

review the work, and they move forward based on my feedback—and we do

that over and over again. The people who work for me typically have similar

relationships with those who work for them, though their ratios are typically

between 10:1 and 20:1. I am always eager to find people who can do things

nearly as well as (and ideally better than) I can so that I can maximize my

output per hour.

Technology is another great tool for providing leverage. To make training

as easy to leverage as possible, document the most common questions and

answers through audio, video, or written guidelines, and then assign someone

to organize them and incorporate them into a manual, which is updated on a

regular basis.

Principles themselves are a form of leverage—they’re a way to compound

your understanding of situations so that you don’t need to exert the same

effort each time you encounter a problem.

c. Recognize that it is far better to find a few smart people and give them the best

technology than to have a greater number of ordinary people who are less well

equipped. Great people and great technology both enhance productivity. Put

them together in a well-designed machine and they improve it exponentially.

d. Use leveragers. Leveragers are people who can go from conceptual to

practical effectively and do the most to get your concepts implemented.

Conceptualizing and managing takes only about 10 percent of the time

needed for implementing, so if you have good leveragers, you can devote a

lot more of your time to what’s most important to you.

13.11 Remember that almost everything will take

more time and cost more money than you

expect.

Virtually nothing goes according to plan because one doesn’t plan for the

things that go wrong. I personally assume things will take about one and a

half times as long and cost about one and a half times as much because that’s

what I’ve typically experienced. How well you and the people working with

you manage will determine your expectations.

14 Do What You Set Out to Do

The organization, like the individual, has to push through to results in order

to succeed—this is step five in the 5-Step Process.

While recently cleaning up a huge pile of work products from the 1980s

and 1990s, I came across boxes and boxes full of research. There were

thousands of pages, most covered with my scribbles, and I realized that they

represented just a fraction of the effort I’d put in. At our fortieth-year

celebration I was given copies of the almost ten thousand Bridgewater Daily

Observations that we’d published. Every one of them expressed our deepest

thinking and research about markets and economies. I also stumbled across

the manuscript of an eight-hundred-page book that I wrote but then got too

busy to publish, and countless other memos and letters to clients, research

reports, and versions of the book you’re reading now. Why did I do all these

things? Why do others work so hard to achieve their goals?

From what I can see, we do it for different reasons. For me, the main

reason is that I can visualize the results of pushing through so intensely that I

experience the thrill of success even while I’m still struggling to achieve it.

Similarly, I can visualize the tragic results of not pushing through. I am also

motivated by a sense of responsibility; I have a hard time letting people I care

about down. But that’s just what’s true for me. Others describe their

motivation as attachment to the community and its mission. Some do it for

approval and some do it for financial rewards. All these are perfectly

acceptable motivations and should be used and harmonized in a way

consistent with the culture.

The way one brings people together to do this is key. This is what most

people call “leadership.” What are the most important things that a leader

needs to do in order to get their organizations to push through to results?

Most importantly, they must recruit individuals who are willing to do the

work that success requires. While there might be more glamour in coming up

with the brilliant new ideas, most of success comes from doing the mundane

and often distasteful stuff, like identifying and dealing with problems and

pushing hard over a long time. This was certainly the case with the Client

Service Department. Through a lot of relentless hard work in the years since

the original problem turned up, the department has become an example to

other teams at Bridgewater—and our client satisfaction levels remain

consistently high. The great irony of all this is that none of our clients ever

even noticed the problems we saw with the memos. Sending out work not up

to our standards was bad—and I’m glad it was corrected. But it could’ve

been much worse, tarnishing our reputation for delivering pervasive

excellence. Once that happens, it becomes much harder to restore trust.

14.1 Work for goals that you and your organization

are excited about . . .

. . . and think about how your tasks connect to those goals. If you’re

focused on the goal, excited about achieving it, and recognize that doing

some undesirable tasks to achieve the goal is required, you will have the right

perspective and will be appropriately motivated. If you’re not excited about

the goal that you’re working for, stop working for it. Personally, I like

visualizing exciting new and beautiful things that I want to make into

realities. The excitement of visualizing these ideas and my desire to build

them out is what pulls me through the thorny realities of life to make my

dreams happen.

a. Be coordinated and consistent in motivating others. Managing groups to push

through to results can be done emotionally or intellectually, and by carrots or

by sticks. While we each have our own reasons for working, there are unique

challenges and advantages to motivating a community. The main challenge is

the need to coordinate, i.e., to get in sync on the reasons for pursuing a goal

and the best way to do it. For example, you wouldn’t want one group to be

motivated and compensated so differently from another (one gets big bonuses

for example, and another doesn’t under the same set of circumstances) that

the differences cause problems. The main advantage of working in groups is

that it’s easier to design a group to include all the qualities needed to be

successful than to find all those qualities in one person. As with the steps in

the 5-Step Process, some people are great at one step and some are terrible at

that step. But it doesn’t matter which is the case when everyone is clear on

each other’s strengths and weaknesses and the group is designed to deal with

those realities.

b. Don’t act before thinking. Take the time to come up with a game plan. The time

you spend on thinking through your plan will be virtually nothing in relation

to the amount of time that will be spent doing, and it will make the doing

radically more effective.

c. Look for creative, cut-through solutions. When people are facing thorny

problems or have too much to do, they often think that they need to work

harder. But if something seems hard, time-consuming, and frustrating, take

some time to step back and triangulate with others on whether there might be

a better way to handle it. Of course, many things that need getting done are

just a slog, but it’s often the case that there are better solutions out there that

you’re not seeing.

14.2 Recognize that everyone has too much to do.

How to do more than we think we can is a puzzle we all struggle with. Other

than working harder for longer hours, there are three ways to fix the problem:

1) having fewer things to do by prioritizing and saying no, 2) finding the right

people to delegate to, and 3) improving your productivity.

Some people spend a lot of time and effort accomplishing very little while

others do a lot in the same amount of time. What differentiates people who

can do a lot from those who can’t is creativity, character, and wisdom. Those

with more creativity invent ways to do things more effectively (for instance

by finding good people, good technologies, and/or good designs). Those with

more character are better able to wrestle with their challenges and demands.

And those with more wisdom can maintain their equanimity by going to the

higher level and looking down on themselves and their challenges to properly

prioritize, realistically design, and make sensible choices.

a. Don’t get frustrated. If nothing bad is happening to you now, wait a bit and it

will. That is just reality. My approach to life is that it is what it is and the

important thing is for me to figure out what to do about it and not spend time

moaning about how I wish it were different. Winston Churchill hit the nail on

the head when he said, “Success consists of going from failure to failure

without loss of enthusiasm.” You will come to enjoy this process of

careening between success and failure because it will determine your

trajectory.

It makes no sense to get frustrated when there’s so much that you can do,

and when life offers so many things to savor. Your path through any problem

is outlined in these principles—and in others you’ll discover yourself.

There’s nothing you can’t accomplish if you think creatively and have the

character to do the difficult things.

14.3 Use checklists.

When people are assigned tasks, it is generally desirable to have them

captured on checklists. Crossing items off a checklist will serve as both a task

reminder and a confirmation of what has been done.

a. Don’t confuse checklists with personal responsibility. People should be expected

to do their whole job well, not just the tasks on their checklists.

14.4 Allow time for rest and renovation.

If you just keep doing, you will burn out and grind to a halt. Build downtime

into your schedule just as you would make time for all the other stuff that

needs to get done.

14.5 Ring the bell.

When you and your team have successfully pushed through to achieve your

goals, celebrate!

15 Use Tools and Protocols to

Shape How Work Is Done

Words alone aren’t enough.

That’s something I learned from watching people struggle to get

themselves to do things that are in their best interests. After I shared these

principles with the people at Bridgewater and refined them, nearly everyone

saw the connection between the principles and our excellent results and

wanted to operate in accordance with them. But there’s a big difference

between wanting to do something and actually being able to do it. Assuming

people will do what they intellectually want to do is like assuming that people

will lose weight simply because they understand why it’s beneficial for them

to do it. It won’t happen until the proper habits are developed. In

organizations, that happens with the help of tools and protocols.

Take a minute to think about how this applies to your reading of this book,

or reading books in general. How often have you read a book describing

some behavioral change you’ve wanted to make but then failed to? How

much behavioral change do you think will result from this book if you don’t

have tools and protocols to help you? My guess is hardly any. Just as you

can’t learn many things by reading a book (how to ride a bike, speak a

language, etc.), it’s nearly impossible to change a behavior without practicing

it. That is why I plan to make the tools that I describe in the Appendix

publicly available.

15.1 Having systemized principles embedded in tools

is especially valuable for an idea meritocracy.

That is because an idea meritocracy needs to operate in accordance with

agreed-upon principles and to be evidence-based and fair instead of following

the more autocratic and arbitrary decisions of the CEO and his or her

lieutenants. Rather than be above the principles, the people responsible for

running the organization must be evaluated, chosen, and—if needed—

replaced in an evidence-based way according to rules, just like everyone else

in the organization. Their strengths and weaknesses, like everyone’s, must be

taken into consideration. Collecting objective data about all people is

essential for this. And you need good tools to convert data into decisions in

agreed-upon ways. Moreover, the tools allow the people and the system to

work together in a symbiotic way to improve each other.

a. To produce real behavioral change, understand that there must be internalized or

habituated learning. Thankfully, technology has made internalized learning

much easier today than it was when books were the primary way of

conveying knowledge. Don’t get me wrong, the book was a powerful

invention. Johannes Gutenberg’s printing press allowed easy dissemination of

knowledge that helped people build on each other’s learnings. But

experiential learning is so much more powerful. Now that technology makes

it so easy to create experiential/virtual learning, I believe that we are on the

brink of another step-change improvement in the quality of learning that will

be as great as or even greater than Gutenberg’s.

We have been trying to create internalized learning at Bridge-water for a

long time, so how we do it has evolved a lot. Since we tape virtually all our

meetings, we have been able to create virtual learning case studies that allow

everyone to participate without actually being in the room. People see the

meeting transpire as though they were in it, and then the case study pauses

and asks them for their own thinking on the matter at hand. In some cases,

they input their reactions in real time as they watch. Their thinking is

recorded and compared with others’ using expert systems that help us all

understand more about how we think. With this information, we can better

tailor their learning and their job assignments to their thinking styles.

That is just one example of a number of tools and protocols we have

developed to help our people learn and operate by our principles.

b. Use tools to collect data and process it into conclusions and actions. Imagine that

virtually everything important going on in your company can be captured as

data, and that you can build algorithms to instruct the computer, as you would

instruct a person, to analyze that data and use it in the way you agreed it

should be used. In that way, you and the computer on your behalf could look

at each person and all the people together and provide tailored guidance, just

like your GPS provides you guidance by knowing all the traffic patterns and

routes. You don’t have to make it mandatory to follow that guidance, though

you can. Generally speaking, the system operates like a coach. And the coach

can learn about its team: Data is collected about what people do so that if

they make more insightful moves or less insightful moves, learning will

occur and be used to create improvements. Because the thinking behind the

algorithms is available to everyone, anyone can assess the quality of the logic

and its fairness, and have a hand in shaping it.

c. Foster an environment of confidence and fairness by having clearly-stated

principles that are implemented in tools and protocols so that the conclusions reached

can be assessed by tracking the logic and data behind them. In all organizations,

it’s always the case that some of the people judged to be ineffective will

argue that those judgments are wrong. When that happens, a data- and rules-

based system with clearly laid-out criteria allows less room for such

arguments and greater belief that the system is fair. Though the system won’t

be perfect, it is much less arbitrary—and can much more easily be examined

for bias—than the much less specified and much less open decision making

of individuals with authority. My ideal is to have a process in which everyone

contributes criteria for good decision making and those criteria are assessed

and selected by appropriately assigned (believable) people. If people maintain

the right balance of open-mindedness and assertiveness so they understand

where they are and aren’t believable to make decisions, having these open

discussions on the criteria for assessing and managing people can be very

powerful in building and reinforcing the idea meritocracy.

We have early-stage tools that achieve these things and we are striving to

refine them so that our people management system operates as effectively as

our investment management system.

Even with its imperfections, our evidence-based approach to learning

about people, guiding them, and sorting them is much fairer and more

effective than the arbitrary and subjective management systems that most

organizations still rely on. I believe that the forces of evolution will push

most organizations toward systems that combine human and computer

intelligence to program principles into algorithms that substantially improve

decision making.

In the Appendix, I’ve provided detailed descriptions of a number of the

tools and protocols that support this idea-meritocratic approach and reinforce

the behaviors that people need to operate consistently with it. They are

designed to help us achieve our goals of 1) learning what people are like, 2)

sharing what people are like, 3) providing personalized training and

development, 4) offering guidance and oversight in specific situations, and 5)

helping managers sort people into the right roles or out of the company based

on what they are like and what is required.

You don’t need to use these same tools and protocols for your own idea

meritocracy, but you should have ways of producing the internalized learning

that it will require. While ours have evolved a lot, yours don’t have to be as

fancy or automated. For example, providing a form or a template to help

guide people through the steps required for them to manage their work or

carry out a process will yield better results than expecting them to just

remember—or figure it out—on their own.

How you decide to use tools and protocols is up to you. The main point I

want to make here is that they’re important.

16 And for Heaven’s Sake, Don’t

Overlook Governance!

All that I’ve said thus far will be useless if you don’t have good governance.

Governance is the oversight system that removes the people and the

processes if they aren’t working well. It is the process that checks and

balances power to assure that the principles and interests of the community as

a whole are always placed above the interests and power of any individual or

faction. Because power will rule, power must be put in the hands of capable

people in key roles who have the right values, do their jobs well, and will

check and balance the power of others.

I didn’t realize the importance of this sort of governance until after I

transitioned out of the CEO role, because I was an entrepreneur and company

builder (as well as an investment manager) who largely did what I thought

was best. While I needed and developed double-checks on myself—I created

a Management Committee that I put above me so that I had to report to it—I

always had the power of my equity to change things, though I never used it.

Some might say that I was a benevolent despot because while I had all the

power (the complete voting rights), I exercised my power in an idea-

meritocratic way, recognizing that the good of the whole was best for us all,

and that I needed to be double-checked. I certainly did not create the sort of

governance system appropriate for Bridgewater, given its scale.

For example, Bridgewater didn’t have a board of directors overseeing the

CEOs, there were no internal regulations, no judicial system for people to

appeal to, and no enforcement system, because we didn’t need them. I, with

the help of others, simply created the rules and enforced them, though

everyone had the right to appeal and overturn my and others’ judgments. Our

principles were the equivalent of what the Articles of Confederation had been

to the United States in its first years, and our policies were like our laws, but I

never created a formal way of operating such as a “Constitution” or a justice

system to enforce them and resolve disputes. As a result, when I stepped out

and passed the power to others, confusions about decision rights arose. After

conferring with some of the world’s greatest experts on governance, we put a

new system in place based on these principles. Still, I want to make clear that

I don’t consider myself an expert on governance and can’t vouch for the

following principles as much as I can vouch for the previous ones, because

they are still new as of this writing.

16.1 To be successful, all organizations must have

checks and balances.

By checks, I mean people who check on other people to make sure they’re

performing well, and by balances, I mean balances of power. Even the most

benevolent leaders are prone to becoming more autocratic, if for no other

reason than because managing a lot of people and having limited time to do it

requires them to make numerous difficult choices quickly, and they

sometimes lose patience with arguments and issue commands instead. And

most leaders are not so benevolent that they can be trusted to put the

organization’s interests ahead of their own.

a. Even in an idea meritocracy, merit cannot be the only determining factor in

assigning responsibility and authority. Appropriate vested interests also need to

be taken into consideration. For example, the owners of a company might

have vested interests that they are perfectly entitled to that might be at odds

with the vested interests of the people in the company who, based on the idea

meritocracy, are most believable. That should not lead the owners to simply

turn over the keys to those leaders. That conflict has to be worked out. Since

the purpose of the idea meritocracy is to produce the best results, and the

owners have the rights and powers to assess that, of course they will make the

determination—though I recommend they choose wisely.

b. Make sure that no one is more powerful than the system or so important that they

are irreplaceable. For an idea meritocracy, it is especially important that its

governance system is more powerful than any individual—and that it directs

and constrains its leaders rather than the other way around. The Chinese

leader Wang Qishan drew my attention to what happened in ancient Rome

when Julius Caesar revolted against the government, defeated his fellow

general Pompey, seized control of the Republic from the Senate, and named

himself emperor for life. Even after he was assassinated and governance by

the Senate was restored, Rome would never again be what it was; the era of

civil strife that followed was more damaging than any foreign war.

c. Beware of fiefdoms. While it’s great for teams and departments to feel a

strong bond of shared purpose, loyalty to a boss or department head cannot

be allowed to conflict with loyalty to the organization as a whole. Fiefdoms

are counterproductive and contrary to the values of an idea meritocracy.

d. Make clear that the organization’s structure and rules are designed to ensure that

its checks-and-balances system functions well. Every organization has its own way

of doing this. The diagram on the next page is a sketch of my

conceptualization of how this should work for Bridgewater, which is

currently an organization of about 1,500 people. The principles it follows,

however, are universal; I believe that all organizations need some version of

this basic structure.

There are one to three chairmen working with seven to fifteen board

members supported by staff, whose purpose is primarily to assess whether: 1)

The people running the company are capable; 2) The company is operating in

accordance with its agreed-upon principles and rules. The board has the

power to select and replace the CEOs, but doesn’t engage in the

micromanagement of the firm nor the people running it, though in the event

of an emergency, they can drop into a more active role. (They can also help

the CEOs to the extent they want it.) While Bridgewater’s idea meritocracy is

ideally all-inclusive, there need to be various circles of authority, trust and

access to information, and decision-making authority, which are shown in the

chart’s three circles.

e. Make sure reporting lines are clear. While this is important throughout the

organization, it is especially important that the reporting lines of the board

(those doing the oversight) are independent of the reporting lines of the CEOs

(those doing the management), though there should be cooperation between

them.

f. Make sure decision rights are clear. Make sure it’s clear how much weight

each person’s vote has so that if a decision must be made when there is still

disagreement, there is no doubt how to resolve it.

g. Make sure that the people doing the assessing 1) have the time to be fully informed

about how the person they are checking on is doing, 2) have the ability to make the

assessments, and 3) are not in a conflict of interest that stands in the way of carrying

out oversight effectively. In order to assess well, one has to gain a threshold

level of understanding and that takes time. Some people have the ability and

the courage to hold people accountable, while most don’t; having such ability

and courage is essential. And the person doing the assessing must not have

conflicts of interest—such as being in a subordinate position to the person

they are intended to check on—that stand in the way of holding them

accountable, including recommending that they be fired.

h. Recognize that decision makers must have access to the information necessary to

make decisions and must be trustworthy enough to handle that information safely.

That doesn’t mean that all people must have access and be trustworthy. It is

possible to have subcommittees who have access to sensitive information and

make recommendations to the board that are substantiated with enough

information to make good judgments, but without disclosing the highly

sensitive particulars.

16.2 Remember that in an idea meritocracy a single

CEO is not as good as a great group of leaders.

Dependence on one person produces too much key-man risk, limits the range

of expertise (because nobody is good at everything), and fails to establish

adequate checks and balances. It also creates a burden because there’s

generally too much to do. That’s why we have a co-CEO model at

Bridgewater that is essentially a partnership of two or three people who lead

the firm.

At Bridgewater the CEOs are overseen by a board largely via the

executive chairman or chairmen. In our idea meritocracy, the CEOs are also

held accountable by the employees of the company, even though these

employees are subordinate to the CEOs. The challenge of having two or three

people is for them to dance well together. If they can’t do that, and coordinate

well with the chairmen, they have to notify the executive chairman or

chairmen so changes can be made.

For the same reason we have more than one CEO overseeing management

of the company, we have more than one chief investment officer (there are

currently three).

16.3 No governance system of principles, rules, and

checks and balances can substitute for a great

partnership.

All these principles, rules, and checks and balances won’t be worth much if

you don’t have capable people in positions of power who instinctually want

to operate for the good of the community based on the agreed-upon

principles. A company’s leaders must have wisdom, competence, and the

ability to have close, cooperative, and effective working relationships

characterized by both thoughtful disagreement and commitment to following

through with whatever the idea-meritocratic process decides.

We work

with others

to get three

things:

1) Leverage

accomplish

our chosen

missions in

bigger and

better ways

than we

could alone.

2) Quality

relationships

that together

make for a

great

community.

3) Money

that allows

us to buy

what we

need and

want for

ourselves and

others.

WORK PRINCIPLES: PUTTING IT ALL

TOGETHER

Since the relative importance of these three things varies by person, it is up

to you to determine the quantities and mix you want. The important thing to

realize is that they are mutually supportive. If you want to accomplish your

mission, you will be better off having quality relationships with people

committed to that mission and financial resources to put behind it. Similarly,

if you want to have a great work community, you will need a shared mission

and financial resources to support you, and if you want to make the most

money possible, you will need clear goals and tight relationships to achieve

them. In my life, I have been lucky to have much more of all three of these

than I could have ever imagined. I have tried to convey the approach that

worked for me—an idea meritocracy in which meaningful work and

meaningful relationships are the goals and radical truth and radical

transparency are the ways of achieving them—so that you can decide what, if

any of it, is of use to you.

Recognizing that I gave you a pile of principles that could be confusing, I

want to make sure that the headline I’m trying to get across comes through. It

is that of all approaches to decision making, an idea meritocracy is the

best.

It’s almost too obvious to warrant saying, but I will anyway: Knowing

what you can and cannot expect from each person and knowing what to do to

make sure the best ideas win out are the best way to make decisions. Idea-

meritocratic decision making is better than traditional autocratic or

democratic decision making in almost all cases.

That’s not just theory. While there is no such thing as utopia just like there

is no such thing as perfect, there is great—and there isn’t much doubt that the

results of this idea-meritocratic approach have been pretty great for

Bridgewater for more than forty years. Because this approach can work

equally well in most organizations, I wanted to lay it out clearly and in detail.

While you needn’t follow this idea-meritocratic approach exactly as I’ve

done it, the big question is: Do you want to work in an idea meritocracy? If

so, what is the best way for you to do that?

An idea meritocracy requires people to do three things: 1) Put their honest

thoughts on the table for everyone to see, 2) Have thoughtful disagreements

where there are quality back-and-forths in which people evolve their thinking

to come up with the best collective answers possible, and 3) Abide by idea-

meritocratic ways of getting past the remaining disagreements (such as

believability-weighted decision making). While an idea meritocracy doesn’t

have to operate exactly in any particular way, it does have to by and large

follow those three steps. Don’t worry about remembering all the particular

principles that I gave you in this book. Just go after having an idea

meritocracy and figure out what works for you by encountering your trade-

offs and coming up with your principles for handling them.

In my case, I wanted meaningful work and meaningful relationships, and I

believed that being radically truthful and radically transparent were required

to get those. Then I went after them and encountered problems that forced me

to make choices. By writing down how I made these choices, I was able to

flesh out my principles, which led me to shape Bridgewater’s idea

meritocracy with the people I worked with so that it would work well for us.

As you set out on your own and encounter your own impediments, you might

want to refer back to these principles because chances are that I’ve

encountered many of the same impediments, did my wrestling with how to

handle them, and laid out my thinking in principles. And then write down

your own.

Of course, people’s abilities to influence how their group works vary, and

I don’t know your circumstances. But I do know that if you want to work in

an idea-meritocratic way, you can find your own way of doing that. Maybe it

will be by helping shape your organization from the top, maybe it will be by

choosing the right organization for you, and maybe it will be by simply

dealing with the people you work with in an idea-meritocratic way. No matter

your position, you can always practice being open-minded and assertive at

the same time, and thinking about your and others’ believabilities when

deciding what to do.

Above all else, my wishes for you are that: 1) You can make your work

and your passion one and the same; 2) You can struggle well with others on

your common mission to produce the previously mentioned rewards; 3) You

can savor both your struggles and your rewards; and 4) You will evolve

quickly and contribute to evolution in significant ways.

40 I’m not saying that it is always the best, as there are some cases where it’s not. I’m

saying that I believe that it is almost always the best if it can be implemented well.

It’s up to

you to

decide what

you want to

get out of

life and

what you

want to give.

ACKNOWLEDGMENTS

My Life and Work Principles are a result of my encounters with reality over

many years. Because these encounters were most importantly shaped with

Bob Prince, Greg Jensen, Giselle Wagner, Dan Bernstein, David McCormick,

Eileen Murray, Joe Dobrich, Paul Colman, Rob Fried, Ross Waller, Claude

Amadeo, Randal Sandler, Osman Nalbantoglu, Brian Kreiter, Tom Sinchak,

Tom Waller, Janine Racanelli, Fran Shanne, and Lisa Safian, they are the

people to whom I am most grateful.

Bob, Greg, and I have spent the greater parts of our adult lives trying to

discover the timeless and universal laws of economies and markets. In the

process, we had daily interactions that were typically thoughtful, infrequently

bloody, and occasionally euphoric. While our meetings were primarily about

economies and markets and led to the discovery of invaluable economic and

investment principles, they also taught us a great amount about ourselves and

about how people should be with each other. We captured these lessons as

life and work principles that were even more valuable. More recently, we did

that with Eileen Murray and Dave McCormick, who together replaced me as

co-CEOs. Thank you, Dave and Eileen, for contributing to, receiving, and

taking care of the boon.

When I first imagined transitioning Bridgewater from a first-generation

organization to a second-generation one, I decided to pull together my

scattered collection of principles into this recipe book to help others at

Bridgewater. Collecting and transforming what started as a messy pile of

principles into this beautiful book was an epic effort that Mark Kirby, more

than anyone, was responsible for helping me with. I also appreciate Arthur

Goldwag’s and Mike Kubin’s contributions in tightening up and refining the

entire manuscript. (Mike did that as a friend.) I further appreciate Arianna

Huffington, Tony Robbins, Norm Rosenthal, and Kristina Nikolova for

taking the time to read the book and provide valuable suggestions.

Those who enabled me most on a daily basis were “Ray’s Angels”

(Marilyn Caufield, Petra Koegel, Kristy Merola, and Christina Drossakis),

“Ray’s Leveragers” (Zack Wieder, Dave Alpert, Jen Gonyo, and Andrew

Sternlight—and past leveragers Elise Waxenberg, David Manners-Weber,

and John Woody), and “Ray’s Researchers” (Steven Kryger, Gardner Davis,

and Brandon Rowley—and past researcher Mark Dinner). I am also thankful

to Jason Rotenberg, Noah Yechiely, Karen Karniol-Tambour, Bruce

Steinberg, Larry Cofsky, Bob Elliott, Ramsen Betfarhad, Kevin Brennan,

Kerry Reilly, and Jacob Kline, who are among the next generation who help

spark and shape our investment principles; to Jeff Gardner, Jim Haskel, Paul

Podolsky, Rob Zink, Mike Colby, Lionel Kaliff, Joel Whidden, Brian

Lawlor, Tom Bachner, Jim White, Kyle Delaney, Ian Wang, Parag Shah, and

Bill Mahoney, who have personified our principles to our clients; to Dave

Ferrucci, who, more than anyone else, has helped me convert the Work

Principles into algorithms; and to Jeff Taylor, Steve Elfanbaum, Stuart

Friedman, and Jen Healy, who are helping me convert them into common

sense for a lot of people. Though my interests and directions have always

been diverse, these teams made my missions their missions, and kept me

moving forward. Without their help, I wouldn’t have accomplished anything

close to what I have. Thank you for enduring me and for selflessly supporting

me.

Whatever beauty you see in the book’s design was the result of Phil

Caravaggio’s generosity and talent. After I put the original version of

Principles online as a PDF, he came to me as a stranger bearing the gift of a

gorgeously designed print edition, created with the help of the artistic book

designer Rodrigo Corral. Phil, who is a brilliant entrepreneur in his own right,

just wanted to thank me because the principles had helped him. The book’s

beauty astounded me, and Phil’s account of what these principles meant to

him was another gift that nudged me closer to making the book a reality.

Once I decided to make it, Phil went on to work tirelessly with Rodrigo to

shape the aesthetic of what you are now holding in your hands—doing so

again solely as a gift. Thank you, Phil!

Six years ago, Jofie Ferrari-Adler, Executive Editor at Simon & Schuster,

read the principles online, found them valuable, and explained to me why

sharing this book was an important thing for me to do to help others. He has

been a valued partner in making that happen. In exploring my publishing

options, I triangulated with others to find the best agent available. This search

led me to Jim Levine. I learned why he is so admired by his clients as he

provides his great time, skill, and empathy. Jim guided me through the

publishing process, which led me to Jon Karp, Simon & Schuster’s President.

From the start, Jon wanted my book to be more what I wanted it to be than

what he wanted it to be, and he helped me make it happen.

Finally, I’d like to thank my wife, Barbara, and my sons Devon, Paul,

Matt, and Mark for putting up with me and my principles—and for giving me

the time and space to create both these principles and this book.

ABOUT THE AUTHOR

Ray Dalio, who grew up a very ordinary middle-class kid from Long Island,

started the investment company Bridgewater Associates out of his two-

bedroom apartment when he was 26 years old, and built it over the next 42

years into what Fortune magazine assessed to be the fifth most important

private company in the U.S. He did that by creating a unique culture—an idea

meritocracy based on radical truth, radical transparency, and believability-

weighted decision making—that he believes most people and organizations

can use to better achieve their own goals.

Along the way, Dalio became one of the 100 most influential (according

to Time) and 100 wealthiest (according to Forbes) people in the world, and

because his unique investment principles changed the industry, CIO

magazine called him “the Steve Jobs of investing.” (Those principles will be

conveyed in his next book, Economic and Investment Principles.) He

believes that his success isn’t due to anything special about him—it is the

result of principles he learned, largely by making mistakes, from which he

also believes most people can benefit.

At 68 years old, Dalio’s primary objective is to pass along these principles

in case others find them of value.

MEET THE AUTHORS, WATCH VIDEOS AND MORE AT

SimonandSchuster.com

Authors.SimonandSchuster.com/Ray-Dalio

CONCLUSION

As I said at the outset, my goal is to pass along the principles that worked

well for me; what you do with them is up to you.

I of course hope that they will help you visualize your own audacious

goals, navigate through your painful mistakes, have quality reflections, and

come up with good principles of your own that you will systematically follow

to produce outcomes that vastly exceed your expectations. I hope that they

will help you do these things both individually and when working with

others. And, since your journey and evolution will certainly be a struggle, I

hope that these principles will help you struggle and evolve well. Perhaps

they will even inspire you and others to put your principles in writing and

collectively figure out what’s best in an idea-meritocratic way. If I could tilt

the world even one degree more in that direction, that would thrill me.

Along these lines, there is more to come. Because I know that having tools

and protocols is necessary to helping people convert what they want to do

into actually doing it, I will soon be making the ones we’ve created available

to you.

I feel I have now done the best I can to pass along my Life and Work

Principles. Of course, we aren’t done with our struggles until we die. Since

my latest struggle has been to pass along whatever I have that has been of

value, I feel a certain sense of relief to have gotten these principles out to

you, and a sense of contentment as I end this book and turn my attention to

passing along my economic and investment principles.

APPENDIX

TOOLS AND PROTOCOLS FOR

BRIDGEWATER’S IDEA

MERITOCRACY

What follows is a quick overview of many of the tools and processes

currently in use at Bridgewater. It’s my intention to soon share many of these

with the wider world in a Principles app so you can try them out for yourself.

COACH

Because there are too many principles for anyone to keep top of mind enough

to apply appropriately to whatever situation they face, and because it’s easier

to ask for advice than to seek it out in a book, I created Coach. Coach’s

platform is populated with a library of common situations, or “ones of those”

(e.g., disagreeing with an assessment someone made, someone lied or did

something unethical, etc.), which are linked to the relevant principles to help

people handle them. As people use Coach, they give feedback on the quality

of advice it provides, essentially coaching the Coach so that it can deliver

better and better advice. Over time, Coach has become increasingly effective

in much the same way Siri has.

DOT COLLECTOR

The Dot Collector is an app used in meetings that allows people to express

their thoughts and see others’ thoughts in real time, and then helps them

collectively reach an idea-meritocratic decision. It surfaces people’s thinking,

analyzes it, and uses the information to help people make real-time decisions

better in a few ways. Specifically:

• Participants continuously record their assessments of each other by

giving them “dots,” positive or negative, on any number of several dozen

attributes. These dots are laid out in a grid that updates dynamically, so

that everyone in the conversation can see one another’s thinking as the

meeting progresses. Doing this helps people shift their perspectives from

being stuck in their own heads with their own opinions to looking down

on everyone’s views. Seeing things through everyone’s eyes naturally

causes most people to adopt the higher-level view in which they

recognize that their own perspective is just one of many, so they ask

themselves which criteria are best for deciding how to resolve the issue at

hand. In this way it promotes open-minded, idea-meritocratic, collective

decision making.

• It helps people make better decisions by providing advice in the same

way a GPS does. By taking data on what everyone in the room is like, the

app is able to give people individualized coaching, which is especially

important when their own opinions are unlikely to be right. We have

found that helping people through such times can be invaluable.

• The Dot Collector highlights what we call “nubby questions”—cases

where the pattern of answers and attributes of people on different sides of

an issue suggest that there’s an important disagreement to be resolved.

For example, it will alert you automatically if you disagree with the

believability- weighted majority on a given issue and give you guidance

on the appropriate steps to take to resolve that disagreement in an

evidence-based way.

• It enables believability-weighted voting. The Dot Collector provides both

a polling interface where people can vote yes or no (or provide a

numerical rating) and a back-end system of believability weighting,

which allows us to look at vote results on both equal-weighted and

believability-weighted bases, not as just simple majorities but also based

on which way the people whose views have the most merit voted. While

this may sound complicated, it’s simply a way of helping people keep

track of believability without having to remember who is more believable

at what.

BASEBALL CARDs

In addition to collecting “dots” about people in meetings, we collect data on

our people in numerous other ways (reviews, tests, the choices people make,

etc.). All these dots are analyzed via computerized algorithms based on

stress-tested logic in order to create pointillist pictures of what people are

like. That logic is typically shared with and vetted by the people in the

company to help its objectivity and believability. We then capture these

pictures in Baseball Cards, which are a simple way of presenting a person’s

strengths and weaknesses and the evidence behind them (in much the same

way as a baseball card does for a professional baseball player).

I found that we needed to have these and refer to them regularly because

without them, people tended to interact with each other without any regard to

who was good or bad at what. For example, Baseball Cards are useful in

meetings, where they allow people to assess the qualities of whoever is

expressing a point of view to determine the merit of that opinion. As a

supplement to Baseball Cards, we developed another tool called the People

Profile, which takes all the data from Baseball Cards (which have grown

complex over time) to provide a simple, text-based summary of what each

person is like. Over time, this is meant to provide employees with a

systemized synthesis that captures Bridgewater’s best thinking about what

someone is like. We work with the people being assessed to compare these

pictures with the assessed person’s own perceptions. In this way of seeking

alignment between the process and the person’s self-perception, both the

processes and the confidences in the perceptions are improved.

In order to match people to jobs, I developed the Combinator, which

takes the data from the Baseball Cards and allows one to look at people based

on their key attributes and compare them to one another. If you’re looking for

a certain type of person to fill a role, you can enter a few names of people

who fit the image, and the Combinator will call up the precise data on what

those people are like, synthesize the key qualities that make them that way,

and then search the database to help you find other similar people. The

Combinator can also be used to generate job specifications (based on the type

of person you are looking for) that you can apply both inside and outside the

company.

ISSUE LOG

The Issue Log is our primary tool for recording our mistakes and learning

from them. We use it to bring all problems to the surface, so we can put them

in the hands of problem solvers to make systematic improvements. It acts like

a water filter that catches garbage. Anything that goes wrong must be “issue

logged” with the severity of the issue and who is responsible for it specified,

so that it’s easy to sort through most problems. Issue logs also provide paths

for diagnosing problems and the information pertaining to them. In that way,

they also provide effective metrics of performance, as they allow you to

measure the numbers and types of problems coming up (and identify the

people who are contributing to them and fixing them).

The Issue Log is a good example of a tool that changed habits and

perceptions. A common challenge people had at first was openly pointing out

mistakes, because some people instinctively viewed pointing out mistakes as

hurtful to the people who made them. Once they got used to doing this, they

realized the benefit of it and they got in the good habit of doing it. Now most

people can’t do without it.

PAIN BUTTON

I believe Pain+Reflection=Progress. In other words, pain is an impor-tant

signal that there is something to be learned, and if you reflect on your pain

well, you will almost always learn something important. That prompted me to

create the Pain Button.

The moment someone experiences pain is the best time for them to record

what the pain is like, but it’s a bad time to reflect because it’s hard to keep a

clear head. So the app is designed to let people record the emotions they are

feeling (anger, disappointment, frustration, etc.) as they feel them and then

come back at a later time to reflect on them using guided reflection questions.

The tool prompts the people who experienced the pain to specify what they

will do to deal with that situation, so that the pain is mitigated in the future

(for example, have a quality conversation with the person who is causing the

pain, etc.). There is a part of the app that shows the frequency of the pain and

the causes of the pain and whether the actions were followed through and

productive. In that way, one receives a sort of biofeedback connection among

the pain that occurred, the diagnosis of it, the plan for improvement so that

the problems are reduced or eliminated, the following through on these plans,

and the results produced. The tool creates a template for looping toward

improvement that everyone can see. It allows you to share your entries with

others or keep them to yourself. Some people have described the Pain Button

as like having a psychologist in your pocket, although better as it’s always

available and a hell of a lot cheaper.

DISPUTE RESOLVER

Disputes need clear paths toward resolution. That is especially so in an idea

meritocracy where people are expected to disagree and create paths for

resolving disagreements. The Dispute Resolver provides paths for resolving

disagreements in an idea-meritocratic way. It asks a series of questions used

to guide the people through the resolution process. One of its features is that

it locates believable people who can help determine whether a disagreement

is worth taking up at a higher management level. The app also makes clear to

everyone that if they have a different point of view from others, it’s up to

them to express it and work to get in sync—instead of privately holding on to

the view and not putting it on the table. Whether you have a tool like the

Dispute Resolver or not, you must have a clear and fair system to resolve

disputes in order to ensure there is a real idea meritocracy. Otherwise the

person with greater power could pull rank on the person with lesser power.

We also have a number of tools that help us complete and oversee our

day-to-day work and stay in sync regarding how things are going.

DAILY UPDATE TOOL

For years, I have asked each person who reports to me to take about ten to

fifteen minutes to write a brief email of what they did that day, the issues

pertaining to them, and their reflections. By reading these updates and

triangulating them (in other words, seeing different people’s takes on what

they are doing), I can gauge how they are working together, what their moods

are, and which threads I should pull. Over the last few years, I’ve developed

this into a software application that pulls these updates into a dashboard,

which makes them much easier to track, record metrics, and respond to than

dealing with dozens of separate email threads. It also allows people to easily

provide helpful data—like their morale, how heavy their workload is, issues

they want to escalate—on a daily basis. I and those I work with find this

simple tool invaluable in helping us stay in sync. Also, at the company level,

it provides valuable information for taking the daily pulse of what’s going on

(morale, workloads, specific issues, who is doing what, etc.).

CONTRACT TOOL

How often have you ended a meeting with everybody saying we should do

this or that, but then everybody walks off and nothing actually happens

because people lose track of what was agreed upon? Implicit contracts are

pretty much worthless; the commitments people make to each other need to

be explicit to be actionable—and firm enough to hold each other accountable.

The Contract Tool is a simple app that lets people make and monitor their

commitments to each other. It helps both the people who requested things,

and those who are required to provide those things, to easily stay on top of

them.

PROCESS FLOW DIAGRAM

Just as an engineer uses flow charts to understand the workflow of what

they’re designing, a manager needs a Process Flow Diagram to help

visualize the organization as a machine. It might have references to an

organizational chart that shows who reports to whom, or the org chart might

supplement the Process Flow Diagram. Ideally the Process Flow Diagram is

made in a way that allows you to both see things simply at a high level and

drop down to lower levels of detail as needed (e.g., when looking at a person

in the diagram, one can click into their Baseball Card and view other info

about them).

At Bridgewater, we’ve created process maps for every department in the

company that show us clearly all the roles and the responsibilities for each

role and how the work flows among them to reach intended outcomes.

POLICY AND PROCEDURES MANUALS

This is the compendium of policies and procedures that people can consult as

one would an operating manual. It’s a living document in which the

organization’s learning is codified.

METRICS

As the saying goes, “You can’t manage what you can’t measure.” By

measuring how your machine is working, you can manage it more easily,

especially if you can enlist the help of algorithms to do a lot of your thinking

and work for you.

Good metrics come about by first thinking of what information you need

to answer your pressing questions and then figuring out how to get it. They

do not come about by gathering information and putting it together to see

what it tells you. At Bridgewater, we talk about four helpful steps to creating

good metrics: 1) know what goal your business is achieving, 2) understand

the process for getting to the goal (your “machine” with its people and

design), 3) identify the key parts in the process that are the best places to

measure, so you know how your machine is working to achieve that goal, and

4) explore how to create levers, tied to those key metrics, that allow you to

adjust your process and change your outcomes. To that end, we encourage

employees to construct our metrics in conjunction with process flow

diagrams and procedures manuals.

The test of the effectiveness of metrics lies in whether they can tell you

what and who is doing well and poorly, all the way down to specific people.

We aim to have metrics that cascade from the most important matters the

CEOs are responsible for at the company level, down through the

departments, to the teams within them and the people responsible in each

role.

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INDEX
A note about the index: The pages referenced in this index refer to the page numbers in
the  print  edition.  Clicking  on  a  page  number  will  take  you  to  the  ebook  location  that
corresponds to the beginning of that page in the print edition. For a comprehensive list of
locations of any word or phrase, use your reading system’s search function.
abilities, 407–8, 435–36
above-the-line conversations, 247
accountability, 402, 468–70
accuracy, in evaluations, 426–27
advancers, 228
advice, 387
AI (artificial intelligence), 262–65
algorithms, 257–62
alignment, 369
see also sync, getting in
answers, 189, 459–60
approximations, 244–46
arguing vs. seeking to understand, 190
assertiveness, 362–64, 365–66
assessments of others, 176, 225–31, 430–35, 438, 535
attributes, positive and negative aspects of, 210–14
auditors, 513
bad behavior, 514
badmouthing, 327–28
barriers, 183–87
blind spot, 185–87, 199, 511
behavior:
change in, 526–27
standards of, 386–87
believability, 190
choosing believable people, 381
comparing your own with others’, 199
in decision making, 256–57, 307–14, 370–83

oversight and, 503
Responsible Parties and, 381
track records in, 380
triangulating and, 193–95
and understanding others’ reasoning, 375–76
below-the-line conversations, 247
bets, 253
big picture, 512–13
blame and credit, 352
blind spots, 185–87, 199, 511
brain, 218–25
“by-and-large” statements, 244–46
capability, 299, 414–15, 490
career paths, 423–24
celebration, 523
change, 136, 244, 411, 434, 526–27
character, 299, 414–15
checklists, 523
checks and balances, 532–36
circumstances, 489
cleansing storms, 502
closed-minded people, 196–98, 362–63
clover-leaf design, 511
collaboration, 368–69, 415
common sense, 251
communication(s):
aimed at educating or boosting cohesion, 383
aimed at getting best answer, 382
clarity in, 470
and different ways of thinking, 460–61
leveraging, 367–68
opportunities for, 479
precision in, 365
types of, 365
see also conversations
compensation, 416–17
complaints, 362, 387
completion, pushing through to, 177–78
compliments, 426, 428
compromise, 305–7
computer algorithms, 257–62
confidence, 457, 527–29

conflicts:
important, 388–89
relationships and, 360
see also disagreements
conscious vs. unconscious mind, 218–19
consequences:
Responsible Parties and, 402
second- and third-order, 155–56, 501
consideration, 343–44, 417
consultants, 507–8
controls, 513–14
conversations:
above-the-line and below-the-line, 247
completion in, 367
logic of, 366
managing, in meetings, 364–68
about mistakes, 433–34
navigating between levels of, 366
see also communication
creators, 228
credit and blame, 352
criticisms, 329–30, 364, 426, 428
culture and people, 299–305
daily updates, 459
data, 527–29
debating, 380, 387
see also disagreements
decisions, decision making:
algorithms and, 257–62
believability weighting, 256–57, 307–14, 370–83
challenging, considering broader context for, 387
choosing Responsible Parties, 401
complaining, advice-giving, and debating vs., 387
criteria for, 499–500
decision rights in, 535
delaying, evaluating benefits vs. costs of, 254–55
and disagreement with consensus, 381
effective, 234–65
emotions and, 236–37
evidence in, 200–201
as expected value calculations, 251–53
fairness vs. getting your way in, 383

faith in, 201–2
group, 366
information access and, 536
levels and, 247–50
past, evaluating, 488–89
pros and cons in, 253
by Responsible Parties, 381
supporting, in spite of disagreement, 389–91
as two-step process, 188, 236–37
and who to ask questions of, 238
delegation, 456
departments, 505, 508, 510
desires, 172–73
determination, 134–35, 161–62
difficult things, doing, 462
disagreements, 384–97
efficiency in, 380–81
and getting in sync, 361–62
getting stuck in, 388–89
important, 388–89
on little things, 388
supporting decisions in spite of, 389–91
surfacing, 299–305, 361
thoughtful, 190–92
triangulating and, 193–95
dishonesty, 329–30, 513–14
distractions, 452
doing what you set out to do, 518–23
dots, 237–46, 429
double-doing, 506–7
dreams, 134–35
drill-down technique, 492–94
ego barrier, 183–84
80/20 rule, 246, 492–94
emotions, 219–20, 227, 236–37
empathizing, 189
enemies, 335
escalation, 471
evaluations, 426–27, 429–30, 438
everything and nothing, being, 149
evidence, 161, 200–201
evolution, 142–45, 423–25

as accomplishment and reward, 147–50
death and, 145–47
maximizing, 150–52
mistakes as part of, 351–52
executors, 228
expectations, 173, 176
experience, 376, 413
extroversion, 226
failure, 351, 440–41, 468
fairness, 344–45, 383, 416, 527–29
fast talkers, 367
fears, of what others think, 137
feedback, 425
feelings, 219–20, 227, 236–37
fiefdoms, 533
firing people, 439–40
5-Step Process, 168–81, 488, 504
flexibility, 173
flexors, 228
Frog in the Boiling Water Syndrome, 476
frustration, 522
generosity, 344–45, 417
genetic programming, 215–17
goal(s):
achieving, vs. looking good, 188–89, 352, 363
building organization around, 502–8
clarity of, 172–74
desires and, 172–73
focusing on, 229, 453
group, and individual incentives, 148
and managing as someone operating a machine, 448–71
motivation for, 520–21
outcomes and, 157–59, 450–51, 477
paths to achieving, 177
right people in the right roles in support of, 231–33
tasks vs., 229, 469, 502–8
unattainable, 173
visualization and, 176
“good,” 141–42
governance, 530–37
gravitational pull, 505

great vs. new, 238
group size, 368–69
group-think, 477
guardrails, 510–11
habits, 178, 220–22, 223
higher level, 157–62, 389–90, 450–52
hiring, 404–19
and candidate’s success elsewhere, 414
capability and character in, 414–15
interviewers and, 411
for long-term mission, 415
and matching people to the design, 407–10
and objectivity in candidates, 411
of outstanding people, 409
personal influence in, 409–10
and showing candidates the real picture, 415
and suitability for different jobs, 409, 410–11
systematic and scientific approach to, 408–9
track records and, 412–15
honorable people, 347
humility, 180–81, 378
hyperrealist, being, 134–35
idealists, 414
idea meritocracy, 307–14, 320
anarchy in, 390
assigning responsibility and authority in, 532–33
governance and, 533
leaders in, 536
and principles embedded in tools, 526–29
understanding each person’s ideas in, 374–75
and well-being of organization, 391–92
ideas, 376
see also opinions
incentives, individual, 148
information, 188, 536
integrity, 327–28
interruptions, 367
introversion, 226
intuiting vs. sensing, 226–27
investigations, 513
“I think that . . .” statements, 380

job slip, 458
job titles, 515
judgments, 189, 383, 436
justice, 332–33
key-man risk, 463, 506
kindness, 426–27
knowing and not knowing, 188, 363
leaders, group of, 536
leadership, 464–66
learning, 136–37, 189
inadequate, 435–36
internalized, 425, 526–27
mistake-based, 354
levels, 246–51
leverage, 515
leveragers, 516
life principles, 131–277
limits, pushing, 152
logic, 251, 366, 376, 527–29
lowering the bar, 442
loyalty, 328, 342
lynch mobs, 390–91
machine, 157
building, 499
and comparing outcomes with goals, 157–59
designer of, vs. worker within, 159
designing improvements to, 496–516
focusing on goal vs., 453
higher level and, 157–62
imperfection and, 501
looking down on, from higher level, 450–52
management of, 448–71
paying attention to, 452
probing and, 458–61
problems and, 176–77, 476–79, 480
visualizing, 500–501
“working through it” period and, 501–2
see also organization
management, 448–71
authoritarian, 466

delegation in, 456
distance and, 458–59
leadership, 464–66
and managers as engineers, 451
managing, micromanaging, and not managing in, 455–56
reasons for failure in, 491
senior and junior, 505
sucked-down phenomenon and, 469
understanding in, 458
martial law, 391
meaningful work and meaningful relationships:
cultivating, 338–47
genetic programming for, 215–17
as mutually reinforcing, 336
and people operating in their own interests, 346–47
and size of organization, 346
truth and transparency and, 137–38
meditation, 199–200
meetings, 364–68, 501
mental maps, 180–81
metrics, 178, 416, 429–30, 452, 470
mind, conscious vs. unconscious, 218–19
mistakes, 348–55
acceptable vs. unacceptable, 354
conversations about, 433–34
in evolutionary process, 351–52
feeling bad about, 351–52
learning and, 354
letting people make, 424–25
patterns of, 179, 352–53
mob rule, 390–91
money, 514, 516
motivation, 520–21
must-dos and like-to-dos, 254
nature, 138–47, 150–52
new vs. great, 238
no pain, no gain, 152
objective viewpoint, 159–61, 354, 431
1+1=3, 368
open-mindedness, 161–62, 198–202, 363
assertiveness and, 362–64, 365–66

radical, 136–38, 182–202, 378
signs of, 196–98, 362–63
openness, 329
operating methods, 435–36
opinions, 238, 375
believability of, see believability
critical, 329–30
past accomplishments and, 374–75, 376
reasoning behind, 379–80
optimizing for the whole, 148
organization(s):
building to fit people, 504
checks and balances in, 532–36
culture and people in, 299–305
departments in, 505, 508, 510
goals vs. tasks in, 502–8
leverage in, 515
people at tops of pyramids in, 503, 508
size of, 346, 504–5
succession and training in, 463, 505–6
top-down organization in, 503
well-being of, 391–92
see also machine
organizational chart, 508–10
outcomes, 156–57, 176–77, 435
and asking who should do what differently, 488
diagnoses and, 491
goals and, 157–59, 450–51, 477
oversight, 503
owner, thinking like, 462
pain, 152, 153–54, 174, 434–35, 500
reflection on, 152–55, 198, 353–54
partnership, 537
pay, 345, 416
peer role, 377–78
people:
allowing to step back after failure, 440–41
assessments of, 225–31, 430–35, 438, 535
building organization to fit, 504
caring about, 464
confidence in, 457
finding better fit for, vs. letting go, 440

firing, 439–40
as forces, 403
hiring, see hiring
how they operate vs. what they did, 435–36
keeping, 418
keeping in unsuitable job, 439
knowledge about, 456–57
observations about, 428–30
outstanding vs. ordinary, 409, 516
performance surveys, metrics, and reviews for, 416, 429–32
personal evolution in, 423–25
and remembering that WHO is more important than WHAT, 398–403
Responsible Parties, 381, 401, 402, 461, 471
right, in the right roles, 231–33
track records of, 412–15
training, testing, evaluating, and sorting, 420–27
transfers of, 441–42
treating appropriately, 463–64
wiring of, 204–33
perceiving vs. planning, 227–28
perfectionism, 246
performance measurements, 416, 429–32
personality assessments, 229–30, 411
perspective, 149–50, 238
plan, 176–78
clarity in communicating, 470
reflection and, 470
as resembling a movie script, 177, 500–501
time needed for, 177, 521
planning vs. perceiving, 227–28
policies, 454
possibilities vs. probabilities, 254
power, 392, 533
precise communications, 365
pressing vs. strategic issues, 512
principles, 255–56, 527–29
agreeing to ignore, 386–87
algorithms and, 257–62
policies and, 454
power and, 392
rules and, 453
suspension of, 391
systemizing, 499–500

tools and, 526–29
violation of, 488
prioritizing, 172
probabilities, 253, 254
probing, 379, 458–61
problem(s), 472–81
big vs. small, 175
and capacity vs. capability, 490
vs. cause for problem, 175
designing improvements to machine to get around, 496–516
diagnosing root causes of, 175–76, 492–95
diagnostic questions for, 485–91
difficult, fixing, 480
drill-down technique and, 492–94
Frog in the Boiling Water Syndrome and, 476
group-think and, 477
identifying, 174–75, 476–80, 478
identifying before solving, 175–76
machine and, 176–77, 476–79, 480
probing and, 459
proximate vs. root causes of, 176
as set of outcomes, 176–77
with solutions vs. without, 480
specificity in identifying, 174, 479
tolerating, 175
two levels of discussion for, 453
progress, 152–55, 495
protocols, 524–29
“public hangings,” 514
purchasing, 514
putting out without taking in, 189
questions, 238, 364, 379, 415
reality(ies), 134–35
embracing and dealing with, 132–67
harsh, avoiding, 174
synthesizing, see synthesis
see also truth
reason, 251
reasonableness, 364
references, checking, 412–13
refiners, 228

reflection, 176, 470
on pain, 152–55, 198, 353–54
rehabilitation, 438–41
relationships:
conflicts and, 360
diagnosis and, 495
see also meaningful work and meaningful relationships
responsibility(ies), 427, 455
anonymous “we” and “they” and, 479
assigning, 457–48, 515, 532–33
checklists vs., 523
and confidence in people, 457
escalation and, 471
to make sense of important things, 382–83
personal, 366
reporting lines and delineations of, 514–16, 535
Responsible Parties (RPs), 381, 401, 402, 461, 471
rest and renovation, 523
results, of doing the same things, 491
rubber-stamping, 513–14
rules, making, 453
sampling people’s work, 434
scale, 504–5
school performance, 413
self-accountability, 173
self-assessment, 225–31
self-management, 232–33
self-reflectiveness, 353–54
sensing vs. intuiting, 226–27
setbacks, 173–74
shapers, 230–31
shoulds, 140–41, 469–70
simplification, 255
skiing, 455
skills, 407–8, 436
solutions, 178–79, 480, 521
speaking up, 329
stories, both sides of, 362
strategic vs. pressing issues, 512
strength(s):
of others, 161
in personal evolution, 423–24

weakness and, 465
stress-testing, 376
student, 377–78
style vs. substance, 364
success:
5-Step Process and, 179, 504
learning from, 427
in life, 134–35
and right people in the right roles, 231–33
trappings of, 173
succession, 463, 505–6
suggestions, 364, 376
suspicious threads, 461
sync, getting in, 356–69, 468
on assessments, 433
bringing issues to the surface, 361
disagreement and, 361–62
as investment, 360
major differences and, 369
as two-way responsibility, 363
synthesis, 237–38, 491
building from specifics up, 428–29
logic, reason, and common sense in, 251
time in, 239–46
tasks:
double-doing, 506–7
goals vs., 229, 469, 502–8
tasting the soup, 478
teacher, 377–78
teams, 412
testing skills, 436
thinking, 223–24
feeling vs., 219–20, 227
threats, 463
time, 254, 516, 522
synthesis and, 239–46
tools, 524–29
topic slip, 366
tough love, 154–55, 305–7, 427–28
track records, 412–15
training, 424, 436, 438–41
transfers, 441–42

transparency, 332–33
radical, 136–38, 308–14, 322–26, 330–35
trial and error, 148–49
triangulating, 193–95
truth, 135–36, 326–27
radical, 137–38, 308–14, 322–30, 336
see also reality
two-minute rule, 367
unconscious vs. conscious mind, 218–19
understanding vs. arguing, 190
updates, 459
vacation, 462
values, 369, 407–8
verbal cues, 460
vision, 511–13
visualization, 176, 230–31, 500–501
“we,” anonymous, 460, 479
weaknesses, 159, 436–38
and finding solutions, 178–79
others’ strengths and, 161
pain of exploring, 434–35
patterns of mistakes and, 352–53
in personal evolution, 423–24
strength and, 465
wiring, 204–33
work:
amount of, 522
habits in, 178
meaningful, see meaningful work and meaningful relationships
passion and, 317
pay for, 345, 416
principles, 270–541
tools and protocols for, 524–29
Workplace Personality Inventory, 229–30
worry, 476
worst-case scenario, 194–95
“yous,” two, 184–85

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